I had the opportunity on Thursday to speak with the CEOs of two of the companies I've written about several times on Real Money: Matt Flemming from HII Technologies (HIIT)and Kenny Hill from Victory Energy (VYEY).
Shares of both companies have been savaged in the recent energy sector rout, but I believe that makes these gentlemen especially insightful on current conditions. It's also a balanced look since Victory is an exploration and production company and HIIT is a service provider. There has been much conjecture as to how those two sectors are interfacing in the face of collapsing oil prices.
Straight from the front lines, here are themes from our conversations:
- It is cheaper to buy production than to drill new wells. Six months ago all the talk in the industry was about massive acreage acquisitions. Since the price plunge, the focus is on buying producing wells, as the premium on owning acreage itself has disappeared. A flowing well can be valued at any price/assumption of future prices (the "strip" in industry parlance) , but raw land carries with it a risk-penalty that, in many cases, is just not economic anymore.
- PDP is king. Companies like Victory that are in the admirable position of looking to buy assets (as opposed to the hundreds of sellers) are focused purely on proven developed producing wells (PDP). Buying proven undeveloped land (PUDs) may still make sense for the major players, but even they haven't been terribly active. Hill made it clear that for a smaller player like Victory, PDP is key and that in the last few weeks he has been presented with a myriad of opportunities.
- Texas is the Center of the Universe. Both Hill and Flemming noted the industry's focus is squarely on Texas,, Both the Eagle Ford and Permian plays are seeing the transfer of rigs and personnel from "cold" plays like the Bakken in North Dakota and the Mid-Continent plays in Oklahoma and Kansas.
- Pricing is happening. Flemming noted that HIIT's E&P customers have extracted about 10% in pricing so far. I believe others in less-specialized fields than HIIT have had to bear twice that. Hill told of a well in the Eagle Ford in which projected completion cost had gone from $9.4 million to $7.8 million in the space of a couple months, further evidence of a 20% reduction in pricing by the E&Ps.
- So the little guy is getting squeezed. Flemming notes a huge increase in business disposition inquiries from smaller "mom and pop" operators in the water transfer business. While HIIT can handle a 10 to 20% price cut, these smaller companies simply can't, and selling out of desperation is a strong possibility. Just as Hill has been fielding many phone calls from willing sellers of wells, Flemming has been fielding calls from managements of companies who provide water transfer services to drill those wells. This is an advantageous position since HIIT was formed, largely, to "roll up" the frac water management sector.
- The banks haven't panicked. Both CEOs mentioned the support of their current lenders as a key to their strategic future. It's a theme that I have picked up on earlier and it's still applicable. The equity and public debt markets have abandoned this sector and priced the remaining entities at Armageddon valuations. However, commercial bankers -- for many of whom this is their fifth downturn -- are not attempting to call in their loans. Hill noted they are still willing to lend for new acquisitions as long as the assets being acquired are PDP.