Energy Prospectus

I am probably going to drop SOI from the Sweet 16 in the next newsletter. I believe well completions will decline by ~70% YOY. SOI has a strong balance sheet and it will survive, so look for chance to buy it later this year when the outlook for oil prices should improve.

Solaris Oilfield Infrastructure Provides Operational Update and Response to Current Market Conditions

Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) ("Solaris") provided an operational update to address current market conditions. Due to a combination of geopolitical and COVID-19 pandemic related pressures on the global supply-demand balance for crude oil and related products, oil and gas operators have significantly reduced development budgets and activity. During the first quarter of 2020, Solaris believes the average number of working frac crews was down as much as 10%, driven by a significant decline beginning in March. The Company expects activity will continue to decline by more than 50% sequentially during the second quarter of 2020.

The Company has taken the following steps to right size the business to ensure its strong balance sheet and service quality are preserved:

Reduced direct operating costs, SG&A expenses and other support costs related to decreasing activity levels;
Reduced workforce across the company; and
Lowered 2020 capital expenditures budget to $10 million or less from $20-40 million previously
As of March 31, 2020, the Company had no debt outstanding, approximately $46 million of cash and $50 million available under its undrawn credit facility.

The Company will continue to evaluate further actions to match its cost structure with evolving market conditions. Additional detail and updated operating cost guidance will be provided on the Company’s first quarter 2020 earnings conference call.

"We have had to make some very difficult decisions to protect the company and its constituents during this global crisis," commented Bill Zartler, Solaris’ Chairman and Chief Executive Officer. "We’ve maintained a debt-free balance sheet and have ample liquidity to weather this storm. We will continue to support our customers’ operations around the clock. We will also continue to invest in improving our existing equipment as well as innovate new ways to help our customers operate more efficiently."

About Solaris Oilfield Infrastructure, Inc.

Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) manufactures and rents mobile equipment that drives supply chain and execution efficiencies in the completion of oil and natural gas wells. Solaris’ patented mobile proppant and chemical systems are deployed in many of the most active oil and natural gas basins in the United States, including the Permian Basin, the Eagle Ford Shale, the STACK/SCOOP formation, the Marcellus and Utica Shales, the Haynesville Shale and the Rockies. Additional information is available on our website, www.solarisoilfield.com.

This is why I'm dropping SOI from the Sweet 16:

Oil & Gas Journal Online: US fracturing set for biggest monthly decline in history
The total number of started fracturing operations will end up below 300 wells in April—a 60% decline in started fracturing operations between the peak level seen in January to February 2020 and April 2020.

OGJ editors
Apr 22nd, 2020

The total number of started fracturing operations will end up below 300 wells in April (close to 200 in the Permian basin and less than 50 wells each in Bakken and Eagle Ford)—a 60% decline in started fracturing operations between the peak level seen in January to February 2020 and April 2020—as the majority of public and private operators implement widespread fracturing holidays, according to Rystad Energy estimates.

In March, Rystad observed an extreme 30% monthly decline in the number of started fracturing jobs in the three major oil basins, a fall from 807 in February to 550. Nationwide fracking activity, on a completed jobs basis, may have already declined by around 20% in March.

“With such a rapid decline in fracking already visible, very little activity will be happening in the oil basins during the remainder of the second quarter of 2020. The natural base production decline, which we have seen as an absolute floor for production, therefore becomes an increasingly relevant production scenario,” said Artem Abramov, head of shale research at Rystad Energy.

“If we assume that no new horizontal wells are put on production from April 2020 onwards, total oil production will decline by 1 million b/d by May, 2 million b/d by July, and by 3 million b/d by October to November, with the Permian basin accounting for more than half of nationwide base decline.”

US light oil operators, which are now announcing voluntary production curtailments, will try to deliver on these cuts as much as possible from the natural production decline, as opposed to shut-ins of producing wells (though some of the marginal, least economic volumes are being shut in, too).

“The magnitude of the base decline for US LTO ("Light Tight Oil") sounds extreme in the context of what we see for other supply sources globally. But ironically, the steep decline is actually too late to save prices; despite the oversupply issue, standard operation patterns prevent operators from simply turning the faucet off. These days Permian wells require about 2 months from the moment fracturing operations start until they produce first oil, and require about 3 months before they reach peak output.”

Hence, the decline in started jobs which began in March will result in a lower number of wells put on production in May, which ultimately will lead to a drop in peak production in June if normal operational patterns are maintained.

“On the demand and storage side, the market is already moving through its toughest challenge yet, and the WTI front-month sell-off emphasized how broken the physical market might be already. We are therefore concerned that significant production shut-ins will be required in the next few weeks to bring the market into the balance in a brutal manner,” said Abramov.
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As I've pointed out in my podcasts the last few weeks: We saw U.S. peak oil production in November, 2019 and it is now unlikely that we see U.S. oil production above that level again this decade no matter how high oil prices rebound. The damage being done to the oilfield services sector is EXTREME. Upstream companies will not ramp up drilling programs even if WTI spikes to $100/bbl because (a) they will need to repair balance sheets, (b) they will be cautious and (c) there won't be workers and equipment ready to go. They call them oil price "cycles" for a reason and seeds of a BIG ONE have already been planted. It will take a few months, but these seeds will sprout.