On July 2, 2013, Barclays published a report titled, “A Pressure Pumping Recovery: The Biggest Surprise for 2013?” emphasizing the firm’s optimistic outlook on the improvement of the pressure pumping market despite the slower than expected growth in rig count.
James West, an analyst at Barclays Capital says spot commodity pricing has stabilized, and in some select cases actually moved up; the largest pressure pumpers are almost fully utilized; there is little to no pressure pumping supply coming into the North American market for the foreseeable future; and demand continues to rise.
West says he believes the market is tightening and industry utilization for pressure pumping is approaching positive levels evidenced by two comments from two of the largest pumpers – Baker Hughes (ticker: BHI) and Halliburton (ticker: HAL). BHI believes industry utilization is near 75% while HAL believes industry utilization was closing in on 80%. West predicts that industry utilization above 80% will drive pricing up in the near-term. West went on to say HAL and BHI are expressing pressure pumping utilization rates around 90% and 75%, respectively.
The report recommends investors should shift their attention from well and rig count to well count, which has increased roughly 10% in Q1 and footage drilled, which also increased more than 10% in Q1.
“These metrics more closely approximate the demand for frac stages, which drive revenue for the pressure pumpers,” West said. “The number of active drilling rigs is a long-standing proxy for activity levels; however, for a number of products and service lines offered in onshore basins, particularly in the unconventional shales that now dominate the U.S. market, the active rig count is a misleading indicator,” West said.
For those that won’t look past traditional indicators such as rig count, Barclays believes gains in the rig count will accelerate in the second half of 2013 as North American operators spend at higher rates than previously expected. Additionally, sustained high commodity prices could lead to more upward revisions of E&P drilling budgets.
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