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 Just putting on a brave face as a downturn looms? Perhaps, but the
optimism could also reflect confidence that the U.S. shale industry
is more resilient to retreating oil prices than investors might
think.
Oil prices have fallen 30 percent since late June and shares of such
firms as U.S. Silica Holdings and Hi Crush, which supply sand to
U.S. drillers, followed, dumped by investors anticipating 2015
output cuts and a drop in demand.
However, the service companies say business remains as strong as
ever. Furthermore, they point out that most of their supply has been
bought under long term contracts meaning next year should be good
too.
"We have not seen any data or had any discussions that indicate
lower demand for our sand," said Robert Rasmus, Co-Chief Executive
Officer of sand producer Hi-Crush after the company reported record
third quarter revenues this week.
Hi Crush's share price has fallen more than 40 percent since the
beginning of September, but Rasmus said almost 90 percent of the
company's sand output was sold for 2015.
His comments echoed those of other firms that supply sand and other
materials to oil drillers.
U.S. Silica Holdings, whose oil and gas sector revenues doubled in
the third quarter of this year, remains upbeat about its outlook.
"We are actively engaged in conversations with our customers about
their future growth, and none has brought down their estimated
requirements," chief executive officer Bryan Shinn told investors
last week.
Demand for sand and the powder-like gum made from guar seeds has
soared in recent years. Both are used in what is known as
"completion" of an oil well, which occurs after drilling and during
fracking to keep open tiny fractures in shale rock to allow oil to
escape.
REBOUND HOPES?
Analysts say that in contrast to investors who have already priced
in a drop in 2015 output because of sliding oil prices, service
firms may still hope for a rebound and hold off with cutting their
outlooks.
Their optimism could also be a sign that the shale oil boom, which
has transformed U.S. energy industry since the end of last decade,
has enough momentum to keep output and service firms' business
rising next year and perhaps beyond even as some drillers already
start cutting their 2015 investment plans.
Industry experts say existing wells that have been drilled but not
yet fracked will keep output surging for months and many have hedged
next year's production well above current prices.
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Furthermore, while U.S. oil prices hit a three-year low below $76 a
barrel this week, several shale oil firms have indicated they would
remain profitable if prices stayed above $70.
That said, a further slide and protracted weakness could force shale
oil companies and their suppliers, many of which have yet to weather
a downturn, to pull back.
Some clouds are already appearing.
Diamondback Energy, an oil producer in the Permian Basin in Texas,
said this week that it would start 2015 with five drilling rigs and
wait to see what oil prices do before adding three more rigs as
earlier planned.
Other firms have also signaled potential 2015 spending cuts should
oil prices remain low or slide further, eventually weighing on their
suppliers' business.
Analysts are closely watching the oil rig count for any early signs
of a slowdown. The number of oil rigs in North America is near
all-time high, according to a weekly survey from service firm Baker
Hughes.
"It all depends how low oil prices go and how long they stay there -
and the jury is still out on that," said Judith Dwarkin, director of
energy research at ITG Investment Research in Calgary. "We will be
watching the rig deployment."
In the meantime, some firms still bet on a continued shale boom.
United Guar, a Houston-based firm that supplies guar gum to U.S.
drillers, plans to triple its processing capacity over the next 18
months, the company's chief executive Aamer Safraz said in an
interview, confident that prices will recover.
"I don't care if fracking slows in the United States," Safraz said.
"You have to take a longer term view."
(Reporting By Edward McAllister; Editing by Tomasz Janowski)
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