Energy Secretary Chris Wright says Donald Trump’s administration is giving the “green light” to more US oil production, but the signal from the fracking company he used to run is flashing bright red.
Liberty Energy Inc. (LBRT), which Wright led until his appointment to Trump’s cabinet, has tumbled 43% this year, one of the most precipitous declines among US energy stocks. The value of Wright’s stake in Liberty has fallen by nearly half to about $30 million over that period.
Liberty’s rout is a warning that all is not well in America’s shale patch, despite Trump’s pledge to achieve “energy dominance.” Oil field servicers often provide the first indication of an industry downturn because they’re the ones hired to drill and frack new wells. After the trade war and OPEC’s recent decision to hike production knee-capped crude prices, investors expect US shale producers to avoid pumping more barrels into an oversupplied market.
A drop in spending on services means US oil production could stall, or even decline this year, for the first time since the pandemic. So far, servicers are getting the brunt of the impact from tariff fears: An index of the companies has slid 28% this year, compared with 7% for oil and gas producers.
“It’s just going to be painful,” said Dan Pickering, chief investment officer at energy-focused financial services firm Pickering Energy Partners. “What comes next, and we’ve already heard whispers of this, it will be slowing down of drilling activity, releasing frack crews.”
Liberty is due to kick off earnings season for oil field servicers on Wednesday after the market closes, with larger rivals Halliburton Co. (HAL), Baker Hughes Co. (BKR) and SLB (SLB) to follow next week.
Oil field service companies are largely dependent on producer spending on drilling and fracking new wells for their income, leaving them uniquely vulnerable to downturns. Producers like Diamondback Energy Inc. and Devon Energy Corp., by contrast, can continue to earn revenue from their existing wells. Plus, they have the option of hedging oil prices and renegotiating for lower-cost drilling contracts.
Even before tariffs, servicers had been suffering from lower demand as shale producers become more efficient, which means fewer drilling days and workers to do the same job. Investors will find out soon if further cuts are coming as contracts inked before the trade war expire and producers respond to the slump in crude prices.
West Texas Intermediate crude oil, the US benchmark, closed at $61.33 on Tuesday, down 14% this year.
“We would not be surprised to see US oil output decline” if low prices persist, Barclays Plc analysts led by Amarpreet Singh wrote in a note to clients on Friday.
A representative for Liberty declined to comment, citing a mandated quiet period ahead of the company’s earnings release. Wright didn’t immediately respond to requests for comment. The energy secretary did, however, put a positive spin on the market in an interview with Bloomberg TV on April 11. Trump’s election gave a “green light” to increase production, with pledges to roll back regulation and expand oil lease sales and permitting, he said.
“Now there is extra fear of world economic growth in the next few months among the tariffs dialogue,” he said. “The marketplace may be discounting the wrong answer here. We will see very positive economic growth in the next few years.”
Investors and analysts aren’t convinced. US revenue for the five biggest frack providers is expected to drop by almost $1 billion this year, a 5% decline and the second consecutive annual drop, according to data compiled by Bloomberg. Last week, producers idled oil rigs in US shale fields at the fastest pace in almost two years.
US shale is on the brink of major cutbacks, according to JPMorgan Chase & Co (JPM). The industry will cut 50 oil rigs at a sustained $60 a barrel WTI price, reducing production by half a million barrels a day, analysts led by Arun Jayaram wrote in a note this week. If prices drop to $55 a barrel, the impact doubles, the analysts said.
Prices falling below $60 “will create softness that’s going to cost us jobs,” said T.M. “Roe” Patterson, co-founder and managing partner at private equity fund Marauder Capital. “We’re going stack rigs and we’re going to see an industry pullback,” Patterson said.
Still, oil field servicers are unlikely to go bankrupt in droves like they did during the 2014 and 2020 downturns. Balance sheets are much healthier after the pandemic as companies focus on capital discipline, said Jeff Krimmel, owner of energy strategy consulting firm Krimmel Strategy Group.
“It’s not like you’re going to see huge swaths of the sector struggling with liquidity, struggling to pay their bills,” Krimmel said. “For the ones that are best differentiated with technology, this might actually be an opportunity for them to make a more compelling case even than they have to this point.”
For his part, Wright wants the oil patch to focus on the benefits he says the Trump administration will bring over the long term. Trump has been clear about his desire for more crude output and lower prices, which will help bring “prosperity at home and peace abroad,” Wright said.
Predictions “of the demise of demand growth for oil are older than I am,” he said in the Bloomberg TV interview. “A long-term growth rate of oil has been going on for decades. I don’t see any big change in that in the foreseeable future.”
But concerns about demand are riding high in an industry that overwhelmingly supported Trump with cash and votes in his run for the White House.
“I would like to see the administration do a little more to put some consistency in their messaging around crude oil and to backstop pricing a little bit,” Patterson said. “Frankly, everything they’re saying right now is kind of counterintuitive.”
