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Oil ServiceLetter From the Road - Takeaways from the PRB and Enercom

John DanielSr. Research Analyst, Piper Jaffray & Co.713 546-7215, john.m.daniel@simmonspjc.com

John Watson, CFASr. Research Analyst, Piper Jaffray & Co.713 546-7256,john.h.watson@simmonspjc.com

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INDUSTRY RISKS

(1) Overbuilding of U.S. frac equipment; (2) loweroil prices; (3) market deconsolidation.

CONCLUSIONWe recently returned from a Powder River Basin tour and also attended the Enercomconference in Denver. While no major industry revelations were gleaned on the trip, largelydue to proximity to Q2 earnings season, the opportunity to catch up with both local E&P andservice companies still offered some incremental data points worth sharing. On these fieldtours, we routinely look for new and exciting technologies and once again, we found oneon this trip, highlighted on the following pages. Similarly, we are equally intrigued when wemeet entrepreneurs who are able to build successful new enterprises in highly fragmentedmarkets. On our PRB tour, we met with two such entrepreneurs: a relatively new frac start-up as well as an emerging well-head company.

Over the past two weeks we have also had the chance to catch up with E&Pprocurement contacts as well as one frac operations friend. These meetings remindus that oil service pricing, particularly pressure pumping, remains pressured. For example,in one case an E&P contact has a dedicated agreement, which one would hope would limitany pricing pressures. However, the E&P recognizes the supply/demand balance favorsthe operator, and thus expects to seek a price concession.

A second E&P will soon go out with a new RFP for frac services. The last time thecompany did so was in Q1. Therefore, the multiple providers who service this E&P willlikely soon see pricing for their respective fleets move lower. Meanwhile, a friend sharedan observation following a recent sales call to a customer who had just received bids for anRFP. The customer remarked that it was interesting to see a handful of bids in very closeproximity to one another. The frac company’s reply: it’s easy to see pricing proximity whenall are pricing at breakeven. In other words, the collective anecdotes from industry contactsall tell the same story which is continued pricing challenges for pressure pumping.

Electric frac continues to be a hot topic, even in conversations with operators. Oneelected against deploying an electric fleet because of the delta between pricing quotes itreceived for electric fleets and conventional ones. Another recently dropped an electric fleetbecause the fleet's pumping hours fell short of those achieved by its conventional spreads.The shortfall in pumping hours, coupled with premium pricing for this electric fleet relativeto conventional, eroded the diesel cost savings realized. Move times for the fleet werelonger than for its conventional spreads, but were not a factor in the fleet being dropped.This E&P claims longer move times are not an issue, depending on the area and padstructure. However, it does believe both elongated lead times and lower pumping hours forthe electric fleet it employed were partially a function of too few people on location. If pumptimes improved, it would consider employing an electric fleet again.

We visited with a private land driller during our travels. Activity is holding steady fornow, most likely a function of E&P’s still showing interest in the PRB. The company didnote customers' reluctance to sign long-term arrangements. Recently, the driller had a rigcome off contract. The contractor sought a six-month arrangement, but the customer optedinstead for a three-month deal at a higher price. Leading edge rates remain near ~$20,000/day.

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Additional Drilling & E-FracConsiderations

At Enercom, another operator noted relatively flat super-spec pricing with slight softness,comments consistent with those made from most of the public drillers during Q2 earnings season.Meanwhile, another contractor commented that a year ago it signed several new contracts forsuper spec rigs in the ~$23k per day range and expected rates to increase to ~$25k plus in 2020.Today it would love to sign new contracts for ~$23k per day, as it did a year ago. With the rigcount continuing to correct, we expect further pricing pressure.

One E&P worries about turbine maintenance for electric fleets. Some capital equipment playersless enthusiastic about e-frac have claimed turbine refurb costs can be a significant percentageof newbuild CapEx and contend such rebuilds are necessary more often than every ~20 yearsas others claim. We cannot corroborate those views but turbine maintenance is worth payingattention to, especially as electric spreads spend more time in the field.

PRB The PRB is a unique basin given the sparse population in the region and great distances betweenoperational hubs (on this trip we drove ~750 miles) which collectively yield a better competitivelandscape relative to some other basins. For instance in the Permian, multiple competing yardsare often a driver’s distance away from one another, a key reason why pricing for a number ofOFS services lines has collapsed as too many can participate in bids.

Consequently, the mood from our meetings was surprisingly upbeat as most see growth in thePRB continuing. The PRB optimism and opportunity set is similarly shared by large E&P’s playingin this area: EOG, DVN, CHK, etc. Just take a look at their respective Q2 earnings commentary.An interesting stat, the PRB rig count is up y/y – not many other basins can make such a claim.

Emerging Technologies: SandCommander and Huff-n-Puff

Sand Commander: With respect to new technologies, CP Energy Services’ Sand Commander isan emerging offering worth paying attention to. The Sand Commander, which was first introducedto the field in 2018, is now up to 24 deployed units and growing – a rate of growth difficult to find inthe L48 market. The system is a rental item used during the flowback process where its value tocustomers is derived in multiple ways. Notably, the Sand Commander design is capable of dryingand sorting sand more thoroughly than alternative techniques. Use of the system eliminates theneed for hydrovac truck services, a service often needed with open top frac tanks, while no cleanout of the Sand Commander unit between wells is required. Meanwhile, the system recycleswater, separates skim oil, and removes harmful gases via its gas buster. In other words, thereis an environmental benefit from this product as well as cost savings which are estimated to be~$7,500/day, or roughly ~20-30% vs. traditional methods.

Advertised benefits also include reduced downtime, a function of the hydraulics design.Consequently, the system purportedly has lower maintenance costs than competing systems dueto fewer mechanical parts. To be fair, we are not able to quantify such savings. Moreover, thereare other designs in the market place. At least one competitor’s website advertises a number ofleading E&P’s as its customers. So by no means does one company have a total monopoly onthis service line. Nevertheless, we wonder what other services in OFS have displayed similargrowth rates in a choppy market over the past 12-18 months. Probably not many. And making thestory that much better, CP Energy Services expects to build and deploy another ~10-12 units bythe end of this year, despite lower drilling and completion activity. Our take: Sand Commander’sgrowth rate as well as its customers, which are all household names, indicate to us it is a productwhich delivers on its advertised efficiencies. It is also another example of oilfield innovation whichwill ultimately benefit the E&P industry.

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Sand Commander (Source: John Daniel)

Huff-n-Puff: At Enercom, multiple operators spoke enthusiastically about the potential for huff-n-puff EOR to lead to an uplift in production for legacy wells in the Duvernay. One in the EagleFord exploring utilizing huff-n-puff believes it could be a big opportunity; another in the regionis less sure.

Successful Entrepreneurship inthe PRB

Many OFS businesses have low barriers-to-entry, a key weakness for the sector. But even inan environment of waning customer demand and equipment oversupply, there are still somecompanies which do well. Often, the reason for the success rests on experienced owners withstrong customer relationships, which is the case with three companies whom we visited on thistour.

The first is a one-fleet frac company which operates for a leading E&P player. The company builta Tier 4 fleet with continuous duty pumps over a year ago. It presently provides frac servicesoutside of Cheyenne, but is based in Casper. Given the dedicated relationship with its keycustomer, our sense is this company is somewhat immune to the pricing pressures afflictingthe broader frac market. Our supposition (and hope) is the E&P customer knows bellicosepricing tactics are unwise, as unyielding pressure could prevent its provider from generating areasonable (and sustainable) return. Potentially, this could lead to a strategic exit strategy byits service provider (our supposition entirely). In other words, E&P’s who help sponsor an OFSenterprise would be wise to not then turn around and run them out of business, particularly whenthese same E&P’s boast strong wellhead returns. Specific to the PRB where a limited numberof frac companies exist, the loss of even one player puts more pricing power back in the handsof the service industry and at some point, these companies will extract revenge.

The second company is a wellhead company based in Casper, Wyoming. This company startedduring the depths of the 2016 downturn, leveraging relationships. Today, the company estimatesit holds ~15% market share within the PRB. The company operates a sizeable facility offeringroom for growth while management lives in Wyoming – a positive as they know their customerswell. Unlike its larger public peers, this company has very little overhead and therefore enjoyscommendable margins. As a result of its success, the company has since expanded into theBakken as well as the Permian.

Last Mile / Sand Two last mile players we spoke to expect to have crews dropped in 2H'19 before being pickedup in early 2020. They both continue to face pricing pressure. More positively, multiple boxplayers continue to tinker with trailers, attempting to decrease total truck weight to allow forhigher payloads. One reminded us that while some containers may regularly max out on volumebefore they max out on weight, others do not. Thus, reducing trailer weight can have meaningfulimplications for payload, total delivered cost, and customer interest.

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Bearish anecdotes with respect to West Texas pricing continue to pour in and we have heardrumors of certain mines in the region idling due to depressed pricing, a lack of contracts, orsome combination of the two. The growth of local sand in Oklahoma has apparently decreasedNorthern White pricing in the basin, leading one mine to deem current rates too low to continueselling into the region.

According to one large operator, multiple pumpers are caught in contracts for in-basin Permiansand with pricing well above current spot levels. Those mines are insisting on contracted pricingbeing paid through the term of the contract. As a result, some of those pumpers have askedE&P's for a higher pumping charge to help offset the higher price they are paying for sand.

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IMPORTANT RESEARCH DISCLOSURES

Notes: The boxes on the Rating and Price Target History chart above indicate the date of the fundamental Equity Research Note, the rating and the pricetarget. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent thefirst Note written during the past three years.Legend:I: Initiating CoverageR: Resuming CoverageT: Transferring CoverageD: Discontinuing CoverageS: Suspending CoverageOW: OverweightN: NeutralUW: UnderweightNA: Not AvailableUR: Under Review

Distribution of Ratings/IB ServicesPiper Jaffray

IB Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [OW] 408 63.65 100 24.51

HOLD [N] 226 35.26 18 7.96

SELL [UW] 7 1.09 0 0.00

Note: Distribution of Ratings/IB Services shows the number of companies currently covered by fundamental equity research in each rating category fromwhich Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. FINRA rules require disclosureof which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell,but instead represent recommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweightwith sell. See Stock Rating definitions below.

Analyst Certification — John Daniel, Sr. Research Analyst— John Watson, CFA, Sr. Research Analyst

The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of mycompensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.

Time of dissemination: 25 August 2019 21:11EDT.

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Research Disclosures

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