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E-Fracs Hold Promise But Do Not Appear Appealing to Industry

Kaibalya Pravo Dey

As WTI crude price stayed below the $60 per barrel mark for the last few months, exploration and production companies are looking for ways to slash production costs in order to boost profits. There’s a path for these upstream companies to significantly increase savings using the E-Frac technology. Moreover, this technology can be a remedy for their environmental concerns, enabling these companies to reduce emissions. Still, this huge opportunity is being swiftly avoided by drillers.

What is E-Frac?

Electric fracking, popularly known as E-Frac, uses natural gas that comes as a by-product of crude oil in the process of generating electricity. This electricity is used to run frac fleets at drilling sites. This way of drilling is better than the conventional diesel-operated fracs as it creates less noise, fixes the problem of flaring, reduces air pollution through lower emissions than diesel fracs and saves diesel costs. Notably, E-Fracs can reduce the cost of fracking in a well by $350,000 from $6-$8 million standard cost per well.

Markedly, heavyweights like EOG Resources, Inc. EOG, Exxon Mobil Corporation XOM, Royal Dutch Shell plc RDS.A are slowly adopting this technology. Wide application of the technology can help drillers save millions of dollars per annum, in turn boosting margins and profits.

However, E-Frac technology is not that popular at drilling sites.

What is Holding It Back?

The cost of building an E-Frac fleet is much higher than the conventional diesel-powered fleet. As oilfield service providers are currently struggling to keep up profit levels, they are laying off staff and idling equipment to boost margins. Notably, since April, the number of active fleets in the United States has declined nearly 19% to around 390, per Reuters. Moreover, slashing of capital budgets by upstream companies, since investors are more focused on returns than hydrocarbon production, has put oilfield service providers in a tough spot. Hence, amid the current unfavourable business scenario, adopting a new technology — which can cost oil equipment suppliers almost double the amount required to build a conventional frac-fleet — is anything but economical.

Oilfield service providers like Halliburton Company HAL, Schlumberger Limited SLB and others, which have been victims of reduced spending by upstream energy companies, have no intention to invest in E-Fracs at present. The cost of conversion of their huge fleet to E-Fracs can result in significantly lower profit levels.

However, Baker Hughes, a GE company BHGE sees gains from this technology. In early 2019, the Zacks Rank #3 (Hold) company debuted its E-Frac gas turbine in the prolific Permian Basin, and estimates huge savings on diesel fuel and maintenance costs per annum as a result of the move. Several small oilfield service providers are also capitalizing on this opportunity by clinching fracking contracts for their small E-Frac fleets. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

To Conclude

Although E-Frac sounds like a smart and efficient investment opportunity, oilfield service providers are currently not in a position to avail the technology. The reduction in capital spending by upstream energy companies will not allow them to adopt this low-cost and environment-friendly fracking system, at least not in the present, extremely volatile, oil-pricing scenario. However, small-scale oil equipment suppliers can reap profits from the current situation via long-term contracts with upstream companies.

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Schlumberger Limited (SLB) : Free Stock Analysis Report
 
Halliburton Company (HAL) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
EOG Resources, Inc. (EOG) : Free Stock Analysis Report
 
Baker Hughes, a GE company (BHGE) : Free Stock Analysis Report
 
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