S&P report examines impact of hydraulic fracturing

The use of hydraulic fracturing and horizontal wells over the past few years have dramatically altered the US energy landscape, and many believe the boom is still in its relative infancy, according to a recent report published by Standard & Poor’s Ratings Services.

“By combining fracing and horizontal drilling, exploration and production companies have greatly increased their access to previously untapped oil and natural gas reserves, which has led to a significant boost in output,” said credit analyst Marc Bromberg. “The result of this pairing has been a significant rise in energy production--a trend that we believe will continue to grow.”

The fracing and horizontal drilling boom in the US has come strong over the past few years and has been a boon in terms of energy production, creating an oversupply of natural gas reserves and reducing the country's reliance on oil imports. However, S&P claims these technologies do pose certain environmental risks.

“We believe the energy industry is poised to continue adding drilling capacity over the next six to 12 months, and service companies will likely benefit as rig demand should remain strong in liquids-rich basins,” said credit analyst Stephen Scovotti. “However, due to the overcapacity of pressure pumping equipment, oilfield service companies that provide pressure pumping services are likely to see lower pricing for their services.”

For E&P operators, the horizontal drilling and fracing boom is among several drivers of profitability, and therefore, credit performance. Completion costs for wells have declined recently, but to varying degrees based on region. While the supply and demand picture is different for the gas and oil industries, a decline in completion costs typically bodes well for companies’ profitability.

“Though still in its early stage, the horizontal drilling and fracing boom is transforming some regional economies,” said Scovotti. “On a larger scale, we think these technologies also have the potential to alter the national economy.”

“We believe the usage of these technologies will continue, particularly in the US, but it will be accompanied by further regulatory oversight regarding environmental and health concerns,” said Bromberg. “We also believe horizontal drilling and fracing present an opportunity for growth in certain international locations.”

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