Noodling with frac horsepower updates this week, we realized that the North American frac fleet will add about 1 million hydraulic horsepower in 2019, despite having 100 frac crews (spreads, fleets… however you want to call them) idle in Q2 2019. In the face of poor returns on capital employed, with about 5 million frac horsepower sitting idle, with 5-10,000 frac hands laid off in the last 5 months, many frac service companies are building horsepower and new frac service companies are emerging. Why? Where’s capital discipline?
We’ve been in the frac industry since 1979, and it has always been like this. With E&P companies across the US pledging to live within their cash flow today, this same capital discipline pledge appears to fall on deaf ears of frac service companies and their investors.
It reminds me of an old joke:
Farmer: “Dang it, I’m losing money on every apple I sell.”
Neighbor: “Then why are you still selling apples?”
Farmer: “I’m hoping to make it up in volume.”
In 2018, North American frac companies added about 3.5 million HHP to the fleet. This year another 1 million will arrive, which will bring the total to almost 27 million HHP. If you are an E&P company, send a note to your frac service companies thanking them for guaranteeing that you’ll enjoy low frac costs forever.