A friend drilling in South Texas said countless frac service companies and sand companies were calling on him trying to sell him services at steeply discounted prices. He commented that it is weird to see oil prices around $75 with drilling activity rising, but have frac guys waiting in his lobby, trying to put idle crews back to work. What gives, he asked?

I said it’s like a line of dominoes that are falling, each knocking over the next in line:

Domino 1: Drilling ramps up in the Permian.

Domino 2: Production ramps up in the Permian.

Domino 3: Production rapidly exceeds pipeline capacity in the Permian, limiting 
future growth.

Domino 4: Pipeline companies start building more pipelines… but that takes a year.

Domino 5: Expensive lease holdings expire in the Permian if you don’t drill, so drilling continues.

Domino 6: With no place to put new oil, operators delay frac work in the Permian, building DUCs.

Domino 7: Idle frac crews in the Permian start seeking work in other basins, like South Texas.

Domino 8: Low frac utilization in the Permian rapidly becomes low frac utilization nationwide.

Domino 9: Frac prices fall hard and fast nationwide, making drilling & completion more economic.

Domino 10: With oil prices rising and drilling costs falling, drilling rises everywhere.

Domino 11: Frac service companies teeter on insolvency mid-year 2019 while oil rises to $80.

Domino 12: Q3 2019 all Permian operators try to hire 100 frac crews simultaneously.

Domino 13: The frac industry is able to crew up 25 in Q3 and 25 more in Q4 2019.

Domino 14: Frac prices skyrocket at year’s end 2019, as the wait for crews extends to 6 months.

Domino 15: New pipelines see oil volumes far lower than anticipated due to lack of frac crews.

Domino 16: Oil prices move to $100.

With this many dominoes in the system, lots of unexpected alterations can occur, but this is what’s happening if the chain remains. 

The question is, knowing the whole picture, where would you interject yourself to create a diversion, or a profit?