An overview of Seventy Seven Energy’s fracturing service business

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SSE’s fracturing services

In this segment, Seventy Seven Energy’s (SSE) portfolio now consists of nine hydraulic fracturing fleets with a combined 360 thousand horsepower capacity.

Revenues from hydraulic fracturing

The fracturing process

The fracturing process consists of pumping a fracturing fluid into a well at sufficient pressure to fracture the formation in order to enhance the production of oil and natural gas from shale formations. This process requires high-pressure pumping systems and other heavy equipment that oilfield service providers like SSE provide.

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The most remarkable growth among SSE’s business segments has been in the hydraulic fracturing business. Revenues more than doubled in a year, from $415.1 million in 2012 to $897.8 million in 2013. The average number of operating fleets increased from five in 2012 to eight in 2013. This increase resulted in a 154% increase in completed stages.

Contracts with CHK

SSE currently performs all of its hydraulic fracturing services for Chesapeake (CHK). Under contracts with CHK, SSE has to complete a minimum of 25 fracturing stages per month at market-based rates.Operating Margin - hydraulic frac

Performance

However, SSE’s revenue per stage decreased 15% from 2012 to 2013, and operating margin for the segment also went down to ~17% in 2013 from 27% in 2012. Margins decreased in 2013 as a result of pricing pressure on hydraulic fracturing services and higher product costs. In 2012, operating margin improved significantly over 2011 in this segment—from an operating loss of 67% to an operating margin of 27%.

SSE started its fracturing business in 2011. As it ramped up its business, operating margins started to improve. You may note that SSE’s business model is tied to completed stages of the rigs according to its contracts with CHK.

Key investments

CHK is a component of the Energy Select Sector SPDR (XLE). Other companies operating in the oilfield service business include Basic Energy Services, Inc. (BAS), Precision Drilling Corporation (PDS), and Pioneer Energy Services Corp. (PES).

Other segments

For an overview of SSE’s other segments, please read on to the next part of this series.

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