A wave of bankruptcies and closures is sweeping across the oil patch, with dozens of hydraulic-fracturing companies at risk, industry experts say.
Most of the companies that help oil-and-gas explorers drill and frack wells are small, privately owned and just a few years old. They are part of a flood of new entrants in the energy business—one that is drying up as oil prices languish below $50 a barrel.
One of the latest casualties is Pro-Stim Services. Launched in 2011 with backing from Turnbridge Capital LLC, a private-equity firm, the company did work for oil-and-gas producers eager to coax more fuel out of the ground in places like Texas and Louisiana.
“The Haynesville Shale was blowing and going at that time,” said Bubba Brooks, who founded the company in Longview, Texas, after working in the oil industry for close to 20 years.
Pro-Stim survived its early years despite stiff competition. Even though a new competitor seemed to enter the market every week, the price of oil was strong—and rising—and demand for fracking services was high.
But U.S. crude prices plunged by 50% between last summer and the start of 2015, and Pro-Stim shut down earlier this year.
Several other companies are in a similar fix. At least five frackers have filed for bankruptcy, stopped fracking, or shut their doors altogether, according to consulting firm IHS Energy. Other analysts say that number may be higher, and they expect many more companies to follow suit or consolidate in a merger frenzy.
Energy analysts at Wells Fargo & Co. say as much as half of the available fracking capacity in the U.S. is sitting idle.
Traditionally, oil-field service companies that helped drill and complete wells were massive conglomerates—such as Schlumberger Ltd. and Halliburton Co.—with operations all over the world.
Schlumberger has dual headquarters in Paris and Houston, and Halliburton is based in both Houston and Dubai.
They, too, are struggling with low oil prices and, along with their peers, have laid off 55,000 people around the globe so far during the current downturn. To cope, big service companies are also slashing their prices, in some cases so low that it is driving out smaller players, analysts and industry experts say.
Small startups began to challenge the Schlumbergers and Halliburtons of the world in 2008, as American wildcatters embraced fracking, the process of blasting a slurry of water, sand and chemicals down a well to break apart densely packed rock, unlocking trapped oil and natural gas. The high-intensity technique has helped push U.S. oil production to its highest level in nearly half a century.
The drilling boom, which began in the wake of the global economic recession and later picked up steam, offered the dozens of new outfits plenty of fracking work from Texas to North Dakota.
“There was that first initial overbuild; everybody kind of went crazy. Mom-and-pop shops were popping up,” said Caldwell Bailey, a consultant at IHS. There are nearly 50 firms in North America that frack wells, he said.
Even when oil prices peaked at more than $100 a barrel last summer, the keen competition among small fracking companies meant many of them were battling to protect their profit margins.
The market has gone from cutthroat to nearly nonexistent in some oil-and-gas fields. So far this year, the amount of fracking work has fallen about 40% from a year earlier, and the price of a frack job has fallen 35%, according to Spears & Associates, a consulting firm for oil-service companies.
Several small publicly traded oil-field service companies—including Key Energy Services Inc. and Basic Energy Services—have debt trading at distressed levels, data from FactSet show. Debt issued by Seventy Seven Energy Inc. is trading at similarly steep discounts. Each of those companies’ shares have fallen more than 75% in the last year.
Analysts at Evercore ISI predict that in certain niches of oil-field services, as many as a third of companies will be gone by the end of next year.
“In addition to the already bankrupt companies it appears to us that many others are currently insolvent or close to it,” said James West, an Evercore analyst. “Some may not know it yet. Many are clinging to hopes of a quicker rebound or just to make it to the upturn.”
Colin Raymond formed Compass Well Services five years ago to frack wells. At the time there wasn’t enough pumping equipment to complete all the new wells companies wanted to drill. The company, based in Fort Worth, flourished. Today, Compass is still doing other work oil-field work, but all its fracking equipment is idled in an industrial yard in South Texas.
Mr. Raymond, whose father is Lee Raymond, the former head of Exxon Mobil Corp., said he saw the writing on the wall earlier this year as the rig count dropped steeply week after week. Getting out of the market as oil prices plunged was the right call, Mr. Raymond said.
“We’ll run in the future when pricing gets better,” he said. “We’re not going to lose money and tear up our equipment.”
Not everyone is willing to wait for a rebound in oil prices. Unused fracking equipment is available for purchase at steep discounts. Mr. Brooks, Pro-Stim’s founder, is one of the buyers. He is starting over with newly formed Premier Pressure Pumping, and is focused on completing wells in more conventional, easier-to-tap locations than have most shale operators.
“There’s still demand for the work we do,” he said.
