Investing $770 per HHP for three fleets with beefed up HP
Frac companies continue to respond to the current shale resurgence, and Keane Group (ticker: FRAC) announced it has ordered three new fleets.
Pressure pumping operations were hit particularly hard by the oil price crash in 2014, and were forced to lay off personnel and idle fleets. While this move was necessary during the lean times of the downturn, it left companies with insufficient active hardware when activity resumed in late 2016.
Pressure pumpers responded by reactivating fleets, but fracturing services are still tight, especially in the Permian. Keane Group, one of the major pressure pumping companies operating in the U.S. responded by ordering three new fleets today.
New fleets will have 25% more horsepower
Each fleet will have 50,000 hydraulic horsepower, larger than the average of around 40,000. Keane is paying $115 million for the fleets, or about $770 per hydraulic horsepower. This seems to be a good price, as in Keane’s most recent horsepower addition it paid about $1,000 per hydraulic horsepower. Keane will pay for the fleets with cash on hand and future cash flow, as only 20% of the cost is due on signing with the balance due upon delivery.
The first two new fleets will be deployed by the end of Q2 2018, and the third will begin operations in Q3 2018. As might be expected, Keane intends to deploy all three fleets in the heart of the modern unconventional business: the Permian.
Keane currently owns about 1.2 million hydraulic horsepower, split over 26 active fleets. The company has just over half of its horsepower in the Permian, but also has major operations in the Marcellus and Bakken.
Two Keane executives, Chairman and COE James Stewart and President and CFO Greg Powell, each extensively discussed the addition of new fleets.
“Supply and demand fundamentals for U.S. oil and gas well completions remain highly constructive for quality completions service providers,” Stuart said. “Favorable conditions have continued to improve throughout the year, and robust 2018 capital budgets announced by producers in recent weeks have amplified and validated the growing demand for our services, which remains in excess of supply. This visibility, coupled with additional pricing improvements, provide the firmness of demand and favorable economics we require to deploy newbuild capital and further our growth trajectory. Given the deployment of all of our previously idled horsepower in 2017, and our partnership with the largest and most efficient customers, we are well positioned to preemptively extend our growth and capitalize on a tightening supply chain. In response, we made the strategic decision to place orders for three additional Tier 4 hydraulic fracturing fleets and wireline trucks, which we expect to deploy in the Permian Basin in response to strong demand. Once delivered, these additional fleets will increase our total hydraulic horsepower to more than 1.3 million, with nearly 800,000 hydraulic horsepower in the Permian Basin concentrated in the Delaware Basin.”
“Improving market signals throughout 2017 have resulted in customer discussions regarding committed newbuild fleets with pricing that now satisfies our margin requirements and capital return thresholds,” said Powell. “We are in advanced discussions with both existing and new customers and expect to execute dedicated agreements for the new fleets by the end of the first quarter of 2018. Further, our established relationships with component and assembly providers have allowed us to optimize newbuild cost and secure beneficial delivery dates, with two fleets expected to be delivered and deployed by the end of the second quarter of 2018, and a third by the end of the third quarter of 2018. We expect these newbuilds to initially generate annualized Adjusted Gross Profit per fleet of greater than $20 million, representing attractive payback economics consistent with our strategic plan.”
