December 19, 2014 Companies: BHI, EOG, HAL, SLB, LON:WEIR

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Weir Sales to Benefit from High-Intensity Fraccing; Industry-Wide Budget Cuts Will Challenge

INITIAL REPORT David Franklin, df@blueshiftideas.com

Summary of Findings

The Weir Group PLC (LON:WEIR) and Gardner Denver Inc. will experience increased equipment, service and supply sales as a direct benefit of the growing use of high-intensity and high sand volume fraccing, provided there is no major slowdown in the oil and gas industry.

Eight fraccing service providers and well completion consultants

explained that while fraccing with high volumes of sand improves

well performance in some oil and gas formations, the practice

significantly shortens the life of pumps, high pressure lines and

fluid ends.

High sand volume fraccing is common in the Permian, Eagle Ford

and Marcellus Basins, with 70% to 90% of all wells using the

technique. On average, between 6 and 15 million pounds of sand

is used per well. The Williston Basin’s dominant fraccing method,

according to one source, is the use of high-viscosity fluids and

ceramic proppants.

Sources expect the hastened failure of fraccing equipment that is

inherent in using high volumes of sand to foster the introduction of

new technologies and equipment. Secondary sources revealed that

new pump designs, monitoring systems and maintenance solutions

are emerging and could help to resolve the issue.

The decline in oil prices is expected to affect oil and gas service

providers following the completion of any existing projects. Two

sources said a slowdown will begin in Q2 2015. One source

indicated the industry is cooling off and will not reverse until oil hits

$80 per barrel. Secondary sources indicate that budget cuts for

independent E&P companies are underway, and some of the major

E&P companies are revising 2015 forecasts.

Weir Pump

Sales

High –

Intensity

Fraccing Use

Oil Price

Impact

Fraccing Service

Providers

Well Completion

Consultants in the

Field

Research Question:

Will Weir benefit from increased use of sand as a proppant for hydraulic pressure

pumping?

Silo Summaries

1) Fraccing Service ProvidersAll four sources expect Weir equipment, supply and

service sales to increase as a direct result of shorter

pump life due to the increased use of sand in high-

intensity fraccing. One qualifying condition is the

assumption that the industry does not experience a

major slowdown due to the decline in oil prices.

Gardner Denver also is expected to benefit from the

now-dominant practice of using high volumes of sand

for well completions. The life expectancy of pumps and

supplies such as fluid ends has been reduced by half (1

to 2 years vs. 4 to 5 years) due to the higher sand load.

One source indicated that there is a 12 week backlog

for pumps from Weir and Gardner Denver. Two sources

working in the Permian Basin said 75% to 80% of all

horizontal wells are using increased sand volumes in

the range of four to seven million pounds of per well. In

the Eagle Ford formation, two operators indicated that

80% to 90% of all wells are being completed by high-

intensity techniques that use, on average, six to 15

million pounds of sand per well. The declining price of

oil looms over the industry. Sources indicated that their

operations are secure for Q1 2015 due to existing

projects, but if oil prices remain low, business will

decline.

2) Well Completion Consultants in the FieldWeir and Gardner Denver are expected to experience a

boost in equipment and supply sales due to the growing

trend of high-volume sand fraccing, which shortens the

lifespan of pumps, according to four in-field oil and gas

well consultants. One source from the Marcellus Shale

play and two sources from the Permian Basin confirmed

that high sand volume fracs are the standard with 70%

to 90% of all completions using the technique,

averaging five million to seven million pounds of sand

per well. The source from the Williston Basin indicated

that he is getting more requests for the high-intensity

technique, but it has not proved successful in this geo-

location, and overall he thinks they only represent 10%

of the well completions in the industry overall. All

sources agree that the wear and tear on the pumping

equipment, fluid ends, and high pressure lines is

significant, and one source indicated it cuts pump life in

half. Operator and service company margins are

expected to be affected severely by the lower oil prices,

which compounds an already challenging problem. One

source said the industry will slow until oil rises to $80

per barrel

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Weir Group

Background

Blueshift’s October 2014 report found that sand companies would continue to benefit from increased sand usage in fraccing.

Most sources stated natural sand consumption is up 30% and pricing is up 20% from last year. By the end of 2016, oil

companies in North America will be pumping 145 billion pounds of sand down wells annually, enough to fill railcars stretching

from San Francisco to New York and back. Larger companies using more sand proppant include EOG Resources Inc. (EOG)

and Apache Corp. (APA), and independents include Occidental Petroleum Corp. (OXY) and Pioneer Natural Resources (PXD).

Sand companies have reported record sales that will continue throughout next year due to ongoing contracts, but if oil

prices remain low due to OPEC policy, sand companies will see a decline in demand if and when some domestic E&P firms

slow operations.

During its Q3 earnings call, RPC Inc. (RES) discussed how the increased volumes of abrasive proppants were causing higher

than normal damage to its pressure pumping equipment, particularly on the fluid ends of the pumps. The increased wear and

tear caused the company’s Q3 disposition of assets expensed to jump from $1.3 million to $7.7 million year to year. Due to

the shorter lifespan, RPC is considering expensing the pressure pumping equipment instead of capitalizing and depreciating

it. To address this effect on expenses, RPC is reexamining proposed job designs and is purchasing better performing pressure

pumping components. The need for more backup hydraulic horsepower is yet another consequence of the increased use of

sand as a proppant.

Weir confirmed full-year expectations in its recent interim report and showed the strongest growth in its oil and gas segment,

where revenue increased 40%. The SPM division of Weir’s oil and gas segment produces the well service pumps and high

pressure flow control equipment that are being exposed to the increased wear and tear caused by more sand use. The

company’s announcement of a cost reduction program was its top quarterly highlight, which should save the company £35

million through the closure of five small manufacturing facilities and cutting approximately 350 jobs, all by 2016. Weir stated

it had not yet felt the impact of falling oil prices, and believes orders for its OEM units in the oil and gas division are far below

peak.

Current Research In this study, Blueshift Research assessed whether Weir would experience higher equipment, supplies and service sales

because of the trend towards high-intensity fraccing. We employed our pattern mining approach to establish three

independent silos, comprising eight primary sources and eight relevant secondary sources focused on the oil and gas industry

and specifically well completion market segment:

1) Fraccing Service Providers (4)

2) Well Completion Consultants in the Field (4)

3) Secondary Sources (8)

Next Steps

Blueshift Research will monitor the growing trend of using high volumes of sand to frac oil and gas wells. We will try to

determine how this trend affects equipment company sales and service revenue. We will research new innovations in the

pressure pumping industry to see if new products and potential solutions to address the problem of high wear and tear on

equipment are introduced and adopted.

Silos

1) Fraccing Service Providers All four sources expect Weir equipment, supply and service sales to increase as a direct result of shorter pump life due to the

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Weir Group

increased use of sand in high-intensity fraccing. One qualifying condition is the assumption that the industry does not

experience a major slowdown due to the decline in oil prices. Gardner Denver also is expected to benefit from the now-

dominant practice of using high volumes of sand for well completions. The life expectancy of pumps and supplies such as

fluid ends has been reduced by half (1 to 2 years vs. 4 to 5 years) due to the higher sand load. One source indicated that

there is a 12 week backlog for pumps from Weir and Gardner Denver. Two sources working in the Permian Basin said 75% to

80% of all horizontal wells are using increased sand volumes in the range of four to seven million pounds of per well. In the

Eagle Ford formation, two operators indicated that 80% to 90% of all wells are being completed by high-intensity techniques

that use, on average, six to 15 million pounds of sand per well. Supply logistics have ramped up rapidly and sand, railroads

and trucking firms are benefiting from the increased sand usage. Higher grade pumping equipment is expected to be

introduced into the industry, but no source indicated when or by whom. The declining price of oil looms over the industry.

Sources indicated that their operations are secure for Q1 2015 due to existing projects, but if oil prices remain low, business

will decline.

Key Silo Findings Background

- Current oil price decline will lead to an industry slowdown after Q1 in 2015.

High-intensity fraccing penetration and adoption trends

- 75% to 90% of wells in the Permian Basin and Eagle Ford formations are using high-intensity fraccing.

- 6 to 15 million pounds of sand are used on each well.

Impact on Weir Group and other manufacturers

- High sand volume fraccing cuts pumping equipment life expectancy by half.

- 4 expect Weir and Gardner Denver to benefit with increased demand for pumps, supplies, and services barring a

substantial industry slowdown due to lower oil prices.

- 1 indicated 12-week backlogs for pumps from Weir and Gardner.

- New and innovative pump design is expected.

Miscellaneous

- Supply logistics have ramped up to meet demand. Rail, trucking and sand companies are benefiting.

1) Completions consultant for a small fraccing service provider working in the Permian Basin

Declining oil prices are thinning the margins for service providers. Stable demand is expected through 1Q 2015.

Thereafter, demand will readjust to the price of oil. If the price stays down, activities will slow, but will grow if prices return

to $75 or higher. Most frac jobs now use enhanced sand volumes in completions, with 4 million to 5 million pounds of

natural sand per lateral as a minimum. Operators are all requesting high sand volumes because wells have responded

with better production across the board. A total of 75% of operators are using high sand volumes now in the Permian.

Increased sand volumes have shortened pump life spans severely, from four to five years down to one to two years. This

likely will increase demand for Weir pumps’ sales and service and fluid ends. This source believes the current demands

of the industry, combined with thinner margins, will result in the elimination of many small providers, leading to buyouts

and consolidation. Sand companies are gaining the most from this trend, along

with rail and trucking. This trend is tough on service providers, but better on

equipment and sand suppliers. This source believes the demand will lead to

equipment redesign with better alloys for longer pump life in the next generation

equipment.

Background

“Our margins are thinning. We have to share the sacrifice.”

“Demand is stable for 1Q15, but we are not sure after that.”

“We now regularly put 4-5 million pounds of sand as a minimum per well.”

“More sand equals more production. Period.”

High-intensity fraccing penetration and adoption trends

“At least 75% of operators now request increased sand volumes.”

“Supply already ramped up to the new reality of high sand volumes for frac.”

High intensity sand fracs lead

to shortened pump life, from 4

to 5 years down to 1 to 2 years.

… Weir should sell lots more

pumps if the industry holds,

and fluid ends must be double

or triple in demand now.

Completions Consultant

Fraccing Service Provider

Permian Basin

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Weir Group

“Supply has adjusted to new demand and will continue if price goes back up and stabilizes.”

Impact on Weir Group and other manufacturers

“High intensity sand fracs lead to shortened pump life, from 4 to 5 years down to 1 to 2 years.”

“Weir should sell lots more pumps if the industry holds, and fluid ends must be double or triple in demand now.”

“Lower demands in the industry and thinning margins will take out smaller service companies and lead to

consolidation.”

“This high demand is great for sand companies and equipment suppliers, but it is tough on the service provider.”

Miscellaneous

“This [high] demand may lead to better designed next generation equipment.”

2) Sales manager for a mid-tier fraccing service provider in the Permian Basin

This source confirmed that lower oil prices are dropping margins across the board, though demand for fraccing services

looks stable for 1Q 2015. Demand for high volumes of sand for fraccing is expected to continue for new frac jobs under

contract. Higher sand volumes enhance production, according to this source, and almost all operators are requesting

high-volume frac techniques, as 80% of the Permian Basin wells now use high sand volumes. The demand has risen

quickly, as has the logistics to meet the need. Production data continues to be the driver, and logistical issues have been

addressed. This source confirmed that high sand volumes continue to shorten pump lifespan by about 50%, and that

fluid ends are replaced often. Weir should continue to benefit from aftermarket sales of pumps, repairs and fluid end

replacements as the use of high volumes of sand continues. This source has heard about new pump designs with

stainless steel alloys to lengthen the lifespan of pumps. The top-tier fraccing service companies have a better supply

chain and have fared better with new demand than smaller companies. Weir and Gardner Denver have a great

opportunity to increase sales if the oil price recovers. This source estimates that the industry averages 5 million to 7

million pounds of sand per well in the Permian Basin.

Background

“Oil prices are dropping our margins. We all have to share in the hit”

“Demand is stable for next quarter. Then demand will follow oil price up or

down.”

“We see this trend [to use more sand] continuing because it works.”

“Operators will continue to want more sand. It raises the well efficiency.”

High-intensity fraccing penetration and adoption trends

“Around 80% of operators now want increased sand volumes.”

“The sand industry and logistics have ramped up quickly.”

“Production data drives demand and logistics have been addressed.”

Impact on Weir Group and other manufacturers

“Sand volumes are causing high wear and tear [on pumps], shortening

pump life by 50%.”

“Weir will have banner sales of pumps and fluid ends if drilling continues.”

“Competition is fierce. We are already seeing new and better pump

designs.”

“The top tier companies have a better supply chain. They are doing well, but it will be tough on the small service

provider.”

Miscellaneous

“Companies like Weir have a bright future if drilling holds.”

“Sand usage now averages 5 to 7 million pounds per well on horizontals in Permian.”

3) Area manager for a mid-sized fraccing service provider in the Eagle Ford Shale play

Lower oil prices already have caused a slowdown in pressure pumping work, according to this source, and future demand

will follow the oil price. Almost all operators are requesting high-volume frac techniques with two to three times the

amount of sand. This source estimated that about 90% of Eagle Ford wells use high sand volumes. The demand already

Sand volumes are causing high

wear and tear [on pumps],

shortening pump life by 50%. …

Weir will have banner sales of

pumps and fluid ends if drilling

continues.

Sales Manager

Mid-tier Fraccing Service Provider

Permian Basin

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Weir Group

has increased in this area, as the trend started in this shale play. The adoption rate for high-intensity frac work is a

function of production data now, and any lingering logistical issues have been resolved. This source confirmed that high

sand volumes cut pump lifespan in half, and fluid ends wear out even faster. Weir should have huge sales increases for

pumps if the oil market does not suffer long. This source acknowledged that there are only a few specialty pump and fluid

end manufacturers, and these manufacturers are building at high rates already. All service providers need to raise prices

as soon as the price of oil rebounds. Weir and Gardner Denver have 12 week backlogs because of the sand volume

issues on pumps. The average sand volume for Eagle Ford horizontals is now 10 million to 15 million pounds per well.

Background

“Oil prices are causing a slowdown for drilling and completions.”

“Demand will follow oil price up or down.”

“Current [fraccing] methods use two or three times more sand now.”

“Operators will continue to request high sand. It works.”

High-intensity fraccing penetration and adoption trends

“Around 90% of operators now want increased sand volumes.”

“The sand industry and logistics have ramped here already. The trend

started here.”

“Adoption rate is a function of production data. Logistics issues have been

addressed here.”

Impact on Weir Group and other manufacturers

“Sand volumes for completions are cutting pump lifespans in half and it is

even worse on fluid ends.”

“Weir and Gardner Denver will have record sales of pumps and fluid ends if

the market doesn’t tank.”

“There is limited competition for these specialty pumps. We are already seeing new and better pump designs

coming.”

“The smaller companies who cut cheap deals are already hurting bad. All service providers will need to raise prices

as soon as oil recovers.”

Miscellaneous

“Companies like Weir have a 12 week backlog.”

“Sand usage now averages 10 to 15 million pounds per well on horizontals in Eagle Ford.”

4) Area manager for a large fraccing service provider in the Eagle Ford shale play

Lower oil prices are keeping margins down at a time when a price increase is needed, according to this source. While Q1

2015 looks to remain stable, future demand will follow the oil price direction. Almost all operators are requesting

enhanced completions using two times the amount of sand than in earlier cycles, with 80% of the Eagle Ford frac jobs

using high sand volumes. This source said the adoption rate for high-intensity fracs is high in the Eagle Ford shale, as the

practice began in that area two years ago. The technique will continue until another technology with superior results

replaces it. This source confirmed that high sand volumes are tough on pumps and fluid ends, and that Weir and Gardner

Denver should see rising demand for new equipment and repairs. There are new and better pumps coming from

manufacturers soon, he said. All pressure pumping companies are hurting from depressed prices during a period of

increased wear on equipment. Weir and Gardner Denver pumps will continue to be deployed as long as the demand

continues. Sand usage for Eagle Ford horizontals now averages 6 million to 10 million pounds per well.

Background

“Oil prices are causing depressed pricing while we need to raise prices for

costs.”

“First quarter 2015 will be stable, then demand will follow the oil price up or

down.”

“We now see about 50% of our work are high-intensity sand fracs.”

High-intensity fraccing penetration and adoption trends

“Around 80% of operators now want increased sand volumes.”

Sand volumes for completions

are cutting pump lifespans in

half and it is even worse on

fluid ends. … Weir and Gardner

Denver will have record sales of

pumps and fluid ends if the

market doesn’t tank.

Area Manager

Fraccing Service Provider

Eagle Ford Shale

Around 80% of operators now

want increased sand volumes.

Area Manager

Large Fraccing Service Provider

Eagle Ford Shale

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Weir Group

“The sand industry and logistics have ramped here already. The trend started here two years ago.”

“People will use the high sand volume until a better technology replaces it.”

Impact on Weir Group and other manufacturers

“High sand volumes for completions are tough on pumps and fluid ends.”

“Weir and Gardner Denver will have record sales of pumps and fluid ends.”

“New and better pump designs will come. When the oil price recovers, there will be an immediate price increase.”

“Pressure pumping companies are hurting from extra wear on expensive equipment in a market with thin margins.”

Miscellaneous

“Companies like Weir will enjoy the boom. It is here to stay.”

“Sand usage now averages 6 to 10 million pounds per well on our horizontals in Eagle Ford.”

2) Well Completion Consultants in the Field Weir and Gardner Denver are expected to experience a boost in equipment and supply sales due to the growing trend of high-

volume sand fraccing, which shortens the lifespan of pumps, according to four in-field oil and gas well consultants. One

source from the Marcellus Shale play and two sources from the Permian Basin confirmed that high sand volume fracs are the

standard with 70% to 90% of all completions using the technique, averaging five million to seven million pounds of sand per

well. The source from the Williston Basin indicated that he is getting more requests for the high-intensity technique, but it has

not proved successful in this geo-location, and overall he thinks they only represent 10% of the well completions in the

industry overall. All sources agree that the wear and tear on the pumping equipment, fluid ends, and high pressure lines is

significant, and one source indicated it cuts pump life in half. The stress on current equipment is expected to prompt new

pump designs, but no source offered a time line or potential manufacturer. The current decline in oil prices is expected to

influence the oil plays more significantly than the gas formations. Fraccing companies were said to have been suffering

declining margins prior to the oil price decline due to the higher costs associated with high-intensity fraccing. Operator and

service company margins are expected to be affected severely by the lower oil prices, which compounds an already

challenging problem. One source said the industry will slow until oil rises to $80 per barrel. Halliburton Company (HAL),

Schlumberger Limited (SLB) and Baker Hughes Incorporated (BHI) are expected to continue to perform well because of their

industry-wide diversity.

Key Silo Findings Background

- Declining oil prices are expected to add to the margin challenges already being experience by field operators.

- Industry-wide slowdown likely, barring an increase in oil prices.

- Oil formations will be impacted more significantly than gas plays.

High-intensity fraccing penetration and adoption trends

- 70% to 90% of well completions in the Marcellus and Permian location use high sand volume fracs. .

- 5 to 7 million pounds of sand on average are used for each well.

- The Williston Basin is not using high-volume sand fraccing technology, generally opting instead for high-viscosity

fluids and ceramic proppants.

Impact on Weir Group and other manufacturers

- Fraccing equipment used in high-volume sand completions experience significantly increased wear and tear.

- 4 sources expect Weir and Gardner Denver to realize increased equipment, supply and service sales.

Miscellaneous

- Halliburton, Schlumberger and Baker Hughes should weather the lower oil prices because of their industrywide

diversity of products and services.

1) Completions consultant for a small geological consulting firm in the Marcellus shale play

Declining oil prices are affecting oil areas much more than the dry gas areas, according to this source. In the Marcellus

Shale play, industry players expect only minimal effects from lower oil prices. High-intensity well completion techniques

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Weir Group

have become the standard here, with good results. Most completion designs have doubled the amount of sand used, and

this source expects the use of large sand volumes to continue based on the positive results obtained using the

technique. Sand supply and logistics could become an issue, but as yet are not. High sand volumes are extremely hard

on equipment, in particular with slickwater fracs. Weir should see the demand for new pumps and replacement fluid ends

increase if oil prices recover. This source expects new competition may enter the pump supply market, because that

market remains strong. All fraccing service providers are suffering margin issues due to higher equipment wear rates

during a period of declining oil prices. This trend will, however, drive demand for new and improved pump designs. The

average Marcellus well now uses approximately 5 million pounds of natural sand.

Background

“The impact of lower [oil] prices is hitting oil plays much more than dry gas.”

“Marcellus players expect little, if any, impact from oil price issues.”

“High-volume fracs are growing here with good results.”

“Most producers have already doubled the sand volume in fracs.”

High-intensity fraccing penetration and adoption trends

“We expect high-volume fracs to continue, because they work.”

“High-intensity fracs are already the standard approach here.”

“Logistics and sand supply are alright for now, but could possibly be an

issue again in the future.”

Impact on Weir Group and other manufacturers

“High-volume sand fracs are tough on equipment, especially when used with

slick water fracs.”

“Weir should see demand rising for pumps and fluid ends.”

“All frac service providers are suffering extreme wear on equipment during a

period of thin margins.”

Miscellaneous

“High-intensity fracs will drive new designs for better pumps.”

“In the Marcellus, sand usage now averages 5 million pounds per well.”

2) Completions consultant for a small well completions consulting firm in the Permian Basin

Declining oil prices are tightening margins, and the demand for completions in 2015 is in question. This source’s

company uses high sand volumes in its current completion scenarios, and operators are requesting high sand volumes

based on the company’s recommendations. Currently 70% to 80% of horizontal wells in the Permian Basin employ

enhanced sand volumes, and the entire supply chain system has ramped up quickly to meet demand. High-intensity frac

sand results in faster wear on equipment and more downtime with fluid ends, cutting pump life by half, and causing even

faster wear on fluid ends. This competitive landscape is thinning margins and will lead to consolidation in the industry,

but while the demand for sand decreases frac margins, it is a boon for sand suppliers. This trend will continue if the oil

price stabilizes. The industry in the Permian Basin now averages 6 million pounds of natural sand per well.

Background

“Tightening margins puts 2015 completions in doubt.”

“Our future expectations are tied directly to price of oil.”

“We use high-intensity frac techniques all the time now.”

“Operators are all requesting high sand volumes and it is our

recommendation as well.”

High-intensity fraccing penetration and adoption trends

“We see 70% to 80% of Permian wells use high sand volumes.”

“Demand and the increased supply have ramped up quickly.”

“Logistics will continue to be the biggest factor on more expansion of sand

volumes.”

Impact on Weir Group and other manufacturers

“Equipment for fraccing will see fast wear and more downtime.”

High-volume sand fracs are

tough on equipment, especially

when used with slick water

fracs. … Weir should see

demand rising for pumps and

fluid ends.

Completions Consultant

Geological Consulting Firm

Marcellus Shale

Weir and Gardner Denver are

the big winners with

heightened demand, but this

thins the margins for frac

providers. Suppliers will

prosper.

Completions Consultant

Well Completions Consulting Firm

Permian Basin

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Weir Group

“These sand volumes cut in half the pump life and are worse on fluid ends.”

“Equipment sales will remain competitive as new designs come out. The consolidation of service providers may be a

factor.”

“Weir and Gardner Denver are the big winners with heightened demand, but this thins the margins for frac providers.

Suppliers will prosper.”

Miscellaneous

“High sand volumes are here to stay at whatever level new wells continue.”

“We now average 6 million pounds of sand per well.”

3) Completions consultant for a small well completions consulting firm in the Permian Basin

Declining oil prices are causing producers to maximize the efficiency off every well, according to this source, and he

anticipates a slowdown until the oil price recovers to around $80 per barrel. This source’s company prefers to use high

sand volumes for completing Permian horizontals. Operators are requesting high sand volumes, but this source’s

company often also uses gel in downhole completions. This source estimates that 90% of wells employ enhanced sand

volumes in Permian Basin horizontal completions. The industry has ramped up quickly to provide for high sand volumes,

and most logistical issues have been overcome. Clients will balance lower oil prices against the price of delivered sand,

which may affect further adoption of the high sand volume methods. This high usage of sand is hard on pumps and fluid

ends, and this source believes Weir and other competitors are experiencing a boom in business to meet demand. The

competitive landscape is leading to new pump designs and better delivery times. The sand demand is tough on service

providers, but helps suppliers. This source estimates an average of 7 million pounds of natural sand is used per well, and

he confirmed that his company just completed three wells using 10 million to 12 million pounds of sand each.

Background

“Declining oil prices makes every producer want to increase efficiency of production.”

“We already are seeing a slowdown until price recovers to around $80.”

“We almost always use high sand volume for horizontal completions.”

“Operators are hiring us specifically to deploy higher sand volume

completion designs.”

High-intensity fraccing penetration and adoption trends

“We see 90% of Permian wells using high sand volumes.”

“The industry ramped up quickly and has already overcome most logistical

issues.”

“The balance between price of oil and price of sand [delivered] is the main

factor for more expansion of high sand volume fracs.”

Impact on Weir Group and other manufacturers

“These methods are hard on equipment, both pumps and fluid ends.”

“Weir and competitors are booming.”

“Good competition will lead to bold, improved designs.”

“Weir and Gardner Denver are the big winners with frac demand, but it is tough for frac providers. Suppliers will

prosper as well as truck and rail.”

Miscellaneous

“High sand volumes are here to stay, at whatever level new wells continue.”

“We now average 7 million pounds of sand per well.”

4) Well completion consultant in the Williston Basin

Equipment manufacturers like Weir will benefit from the increased use of high-intensity fraccing. There is much less of this

activity in the oil-prone areas of the Williston Basin, and in Wyoming and Montana, as plays in these areas favor high-viscosity

fluids and ceramic proppants. Falling oil prices are putting pressure on the margins of all service companies. Larger outfits

like Halliburton, Baker Hughes and Schlumberger stand to fare better in the more competitive environment as they can bring

in revenues from diverse sectors of the industry.

We see 90% of Permian wells

using high sand volumes.

Completions Consultant

Well Completions Consulting Firm

Permian Basin

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Weir Group

Background

“[The high-volume treatments] tend to be more popular in gas prone areas as opposed to oil. I’m in the Williston

Basin, which is an oil basin primarily, so I don’t see quite as much of it up here. We see people wanting to try it

because they’ve been convinced by some conference they’ve been to, that if it works in South Texas it should work in

North Dakota, in a totally different reservoir and a totally different basin, in oil instead of gas.”

“[Declining oil prices] is definitely having an impact. As soon as the price dropped, those companies that were

investing money, looking largely for high rate returns—particularly in oil—they started pulling back immediately. So the

companies that were reliant on them were the first ones to slow down.”

“The [newer players seeking high rates of returns] tend to be less like historical oil companies and more like modern

house flippers, and they’ve instantly into pulled their horns in and are starting to think about dumping their property

and taking their money to somewhere else.”

“By contrast, the historical oil companies—especially the larger ones with good land positions—they haven’t really

panicked yet. They definitely have started to look at their vendors, asking them for some help with the economics of

the business, because the price of services went up when price of oil was going up.”

“So the service companies have started to come back down in price on their services in exchange for giving them

some more work, and allowing the operator to continue to drill more wells.”

[What do you see for market conditions in Q1 2015 and beyond?] “For me, in the Williston Basin here, and also for

the work that I do in Wyoming and Montana, winter tends to slow things down anyway, so there’s going to be a

certain amount of that occurring regardless [of oil prices].”

“Another issue is that, for a lot of Montana and Wyoming, Federal minerals are very expensive to develop because of

the difficulty in permitting and the high cost of locations, and all the other things that aren’t necessarily required on

fee land or privately owned land. So I see [lower oil prices] having a bigger impact on some of those [Montana and

Wyoming projects] than those in North Dakota.”

“The other thing about Federal leases is that they’re generally longer leases—five to ten years, versus private leases,

which are generally shorter. Private operators tend to sign three-year leases, which means those operators have to

drill within three years [regardless of where the oil price is]. Those sitting on Federal leases can wait out the oil

price.”

“So you tend to see a little less drop off on the private land, such as North Dakota. [Having said that], in North

Dakota we have road restrictions that occur from the end of February to the end of May, due to frost; heavy

truckloads tend to damage the roads, so there are a lot of weight restrictions which really drive up the cost of

operating in those months. You can’t haul as much fluid or proppant in a truck. So if you’re doing those monstrous

jobs, all of a sudden it takes twice as many trucks to get the proppant there as it did a week earlier.”

High-intensity fraccing penetration and adoption trends

“I almost always concentrate on ceramics, but looking at the industry in general, I would say these high-volume

treatments are maybe 10% of what’s going on out there now [in the oil industry], and it’s mostly from my perspective

a copycat deal; [operators] are largely copying EOG [Resources Inc./EOG].”

“EOG got [the high-volume treatments] started in part because they could afford to; they owned their own sand

mines. The sand mines they own produce the smaller sized proppants. A lot of people have copied it and have not

found it to be as economical because they don’t get that special [price] treatment on the sand purchasing side.”

Impact on Weir Group and other manufacturers

“Obviously the more pounds of proppant you pump—and in particular a lot of these higher volume proppant jobs,

which end up being slickwater treatment jobs—they are especially hard on fracturing equipment.”

“[These high-volume jobs] cause a lot of wash outs on the pumping equipment, especially on the fluid ends.”

“It’s well known within the industry that higher volumes of sand—especially smaller mesh sands … tend to be much

more abrasive in these low-viscosity fluids, and as a consequence cause a lot more damage and require a lot more

high-pressure pump body replacements over the life of a truck.”

“Service company operators in the field are telling me that they have a much higher failure rate, not only in their

pumping equipment, but also in the high-pressure treating lines that they have to pump through a surface for the

same reasons.”

“It’s hard for me to put a number to it, but just on rough exposure, I hardly ever have any failures in the kind of jobs I

do with high viscosity cross-linked with ceramic proppants; these don’t wear the pumps out in those fluids as fast.”

“If you actually wash a hole into the body of a pump, then that truck’s down until you get a complete pump

replacement; it’s going to have to go back to the shop.”

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“On the other hand, if you wash out valves, or maybe some accessories or plumbing that’s associated with the pump,

then it may be field repairable on location. But generally if you see that problem, it’s just a matter of time before the

pump itself is going to fail.”

“[In an environment of falling prices from service companies], it’s certainly better to be a bigger company, with a

more diverse client base. Some of the smaller [service] companies that have moved into the Williston Basin, for

instance, that came here and got a niche job when all you had to do was show up with equipment and somebody

would beg you to come work for them. When things start to slow down, then you go from being hardly able to keep

up, to nothing.”

“A Halliburton or a Schlumberger, Baker Hughes on the other hand—those companies are diverse enough that

they’re still bringing money in from all the different branches of the industry, rather than just bringing in fracturing or

some tool division or wireline.”

Secondary Sources

The following eight sources discuss the increasing amount of sand use in fraccing operations and the future demand and

options for hydraulic pressure pumping equipment.

Increasing Amount of Sand Use Fraccing sand demand and price is on the rise, with 20% of shale wells using increased amounts of sand, a number that may

soon rise to 80%. Transporting sand makes up 58% to 75% of its final price. Raw sand accounts for the highest sales volume

in the proppant market, but resin coated sand and ceramic account for a greater share of monetary demand. Resin-coated

sand will see the highest increase in demand among proppant types.

Nov. 28 Oilprice.com article

Using more sand during the frac process can increase oil output by 30%. While 20% of shale wells now use extra sand,

soon 80% may use increased amounts. Sand prices could increase another 50% in coming years.

“Frac-sand often comes from high-purity quartz and is crush resistant, allowing it stay intact while shale rock

fractures. A single frac job can require several thousand tons of sand. But oil and gas companies have found that by

increasing the volume of sand in the fracturing process, they can increase output, often by as much as 30%.”

“The number of shale wells using that extra burst of sand stands at just 20%, but may rise to 80% according to RBC

Capital Markets.”

“Prices have climbed as demand has increased. In 2010, frac-sand sold for between $45 and $50 per ton, but that

jumped to $54 per ton the following year. Sand prices could increase by 50% in the coming years as demand rapidly

rises.”

Nov. 25 ValueWalk article

Demand for frac sand is outpacing supply. Oil and gas companies will use 95 billion pounds of frac sand this year, up

50% from forecasts made just last year. The practice of downspacing is requiring twice as much sand. 58% to 75% of the

total price paid for frac sand is its transporting cots. US Silica sees demand for its own sand volume doubling or tripling

next year.

“When it takes up to four million pounds of sand to frac a single well, it’s no wonder that demand is outpacing supply

and frac sand producers are becoming the biggest behind-the-scenes beneficiaries of the American oil and gas

boom.”

“‘One of the major players in Eagle Ford is saying they’re short 6 million tons of 100 mesh [sand] alone in 2014 and

they don’t know where to get it. And that’s just one player,’ Rasool Mohammad, President and CEO of Select Sands

Corporation told Oilprice.com.”

“Frac sand exponentially increases the return on investment for a well, and oil and gas companies are expected to

use some 95 billion pounds of frac sand this year, up nearly 30% from 2013 and up 50% from forecasts made just

last year.”

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“Pushing demand up is the trend for wider, shorter fracs, which require twice as much sand. The practice

of downspacing—or decreasing the space between wells—means a dramatic increase in the amount of frac sand

used. The industry has gone from drilling four wells per square mile to up to 16 using shorter, wider fracs. In the

process, they have found that the more tightly spaced wells do not reduce production from surrounding wells.”

“Oilfield services giants such as Halliburton Co. and Baker Hughes Inc. are stockpiling sand now, hoping to shield

themselves from rising costs of the high-demand product, according to a recent Reuters report. They’re also buying

more sand under contract—a trend that will lead to more long-term contracts and a longer-term boost for frac sand

producers.”

“Chicago-based consulting company Professional Logistics Group Inc. found in 2012 that transportation represented

58% of the cost of frac sand, while Select Sands estimates the costs between 66% to 75% today.”

“US Silica Holdings Inc. says demand for its own volumes of sand could double or triple in the next five years, and its

three publicly-traded rivals—Emerge Energy Services Fairmount Santrol and Hi-Crush Partners have also made strong

Wall Street debuts over the past two years.”

June 30 Freedonia report

Demand for all well stimulation materials are forecast to increase 10% annually. Environmental concerns eventually may

influence the high volumes of fluid used in well stimulation. Raw sand dominates volume sales, but value-added coated

sand and ceramic each account for a greater share of monetary demand. Resin-coated sand are expected to register the

fastest growth among proppants.

“Demand for well stimulation materials in the U.S. is forecast to climb more than 10 percent annually, reaching

$15.2 billion by 2018. Historically high oil prices and rebounding natural gas prices are expected to be the main

factors promoting continual growth in well completion activity.”

“Newer technologies—such as horizontal drilling and high-volume, multistage hydraulic fracturing—will increase the

amount of materials used per well. Proppants will remain the highest volume material used in well stimulation.

However, demand for chemicals will be boosted by an emphasis on higher-value, more environmentally friendly

formulations.”

“Potential restraining factors include growing environmental concerns about the high volumes of fluids used in

stimulation and the maturation of key unconventional plays. Additionally, although the number of fracturing stages is

expected to grow, this will be less of a factor in future material demand.”

“The two main product sectors in the well stimulation industry—proppants and chemicals—each have a distinct group

of suppliers and face unique demand variables. Proppants account for more than half the market in monetary terms.

Although raw sand dominates volume sales, value-added coated sand and ceramic proppants each account for a

greater share of monetary demand.”

“Resin-coated sand proppants are expected to register the fastest growth, as proppant loads continue to increase

and operators develop formations with higher closure pressures. Gelling agents account for the highest dollar sales

of stimulation chemicals and are expected to continue to do so over the forecast period. However, because of a price

correction for guar gum, sales of gelling agents are projected to be lower in 2018 than they were in 2013.”

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Future Demand for Fraccing Equipment Weir Group and Rolls Royce, a host of smaller companies, and an industry expert doling out free meticulous maintenance

advice all claim to have the solution to increasing hydraulic fraccing pumps’ lifespan. But demand for fraccing equipment

companies’ new products may cool as oil and gas service providers slash budgets.

May 14 Energy Global article

Weir Oil and Gas teams up with Rolls-Royce to develop power systems for hydraulic fraccing that would be available by

mid-2015. The team will optimize the engine, transmission and fracturing pump. The fully integrated system will allow

equipment to have longer run times and greater efficiencies. Full-service preventive maintenance will be part of the

package offered to customers.

“Weir Oil and Gas and the Rolls-Royce Power Systems company MTU have signed an agreement to develop power

systems specifically engineered for hydraulic fracturing. The fully-integrated power system is expected to be available

to customers in mid-2015.”

“The agreement outlines the companies’ plans to work together to address the market need for more reliable and

continuous duty equipment. A team of engineers is concentrating on optimizing the interface of the three most

critical components—the engine, transmission and fracturing pump—to work as one system. The complete packaged

power system will also use smart controls that provide conditioned monitoring and optimized performance for the

operator.”

“Steve Noon, Weir Oil & Gas Divisional Managing Director, commented: ‘Our teams are working to develop fully

integrated purpose-built power systems for fracking. This innovative approach will introduce a complete package,

with all components built specifically for fracking applications, integrated and optimized to work together, have

longer run times and provide greater efficiencies for our customers. It is something the industry has asked for and

we are determined to deliver.’ He added that the agreement also provides for full service and preventive

maintenance of the entire power system, achieved by using Weir’s market-leading service network combined with

MTU’s service capability, ensuring close proximity to customers.”

“‘Together we are taking a completely integrated approach to designing a pumping power system that addresses the

challenges faced by frac site operators. We’ve brought our best engineering minds together to design a solution that

enhances run times for the engine, transmission and pump, creating a robust system that will enhance operations. It

is a new approach that offers customers one efficient supplier for such a critical system,’ concluded Haidinger [Dr.

Michael Haidinger, Chief Sales Officer of Rolls-Royce Power Systems].”

Dec. 10 World Pumps article

A smaller equipment supplier introduces a new product that channels abrasive fluids away from hydraulic fracturing

pumps. The system cuts maintenance costs, increases equipment lifecycle, and helps create a more reliable, cost-

effective process.

“The VorTeq hydraulic pumping system from Energy Recovery [Inc.] channels abrasive fluids away from existing

hydraulic fracturing pumps, allowing them to only process fresh water. This not only cuts maintenance costs with the

company claiming it will more than double the lifecycle of components, but means the pumps last significantly

longer.”

“‘The new VorTeq pumping system will change the way that companies frack, providing a more reliable and more

cost-effective process,’ said Tom Rooney, CEO of Energy Recovery.”

“‘This system will give service providers a competitive edge by allowing substantial cost savings and additional

production capacity. With fewer at-risk hours spent on maintenance, we believe VorTeq will also enhance safety

during frac jobs,’ said Ron Gusek, vice president technology and development, Liberty Oilfield Services.”

Sept. 26 Upstream Pumping article

National Instruments offers a solution to the improving lifespan and effectiveness of hydraulic pumps by using its

embedded monitoring systems.

“Oilfield service companies have mature assets that require an efficient maintenance schedule. The need for flexible

tool sets capable of adjusting production operations to meet unconventional oil and gas sites is becoming a

requirement instead of an option. Pumps play a critical role in this process.”

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“The convergence of sensors, storage and connectivity has introduced the concept of the Internet of Things (IoT).

This means the oil and gas industry is moving away from disparate, isolated operations and toward arrangements in

which equipment assets and systems communicate with each other. As embedded systems become ubiquitous,

each pump, chiller and industrial machine will have an IP address. ”

“While this provides a glimpse of the future, it is estimated that less than 10 percent of oil and gas field equipment is

currently outfitted with embedded devices and sensors. Also, triplex and quintaplex pumps range in cost from

$250,000 to $300,000. Since pumps are among the most expensive pieces of equipment, monitoring their

performance is critical. Oilfield service companies must prioritize to create a more comprehensive fleet-wide

monitoring plan.”

“Currently, pumps in the oil and gas industry contain only a few discrete sensors that monitor their critical operating

parameters. Instead, discharge pressure, rotations per minute (rpm), lube oil pressure and lube oil temperature

should be monitored.”

“A monitoring system should reduce pump failures and overall pump maintenance costs. Without adopting advanced

technology, engineering managers will be left with an incomplete view of their fleet operations. For example,

operators may not understand that pump aging accelerates based on how they run them.”

“Companies must integrate a spectrum of applications in the oilfield cost effectively. These applications may include

surface operations such as the real-time synchronization across pumpers and proppant delivery. Control systems

allow operators to direct the mixing and pumping process at a safe distance while monitoring the equipment’s

condition.”

“Companies must also strike a balance between characteristics that offer ruggedness—such as shock, vibration and

temperature span—and those that offer processing flexibility, input/output (I/O) counts and onboard storage

capabilities. While custom or traditional approaches offer a high I/O count, they provide limited functionality from a

software programming perspective.”

April 3 Upstream Pumping article

RPC Inc. (RES) recently claimed an increased amount of damage to its fluid ends caused its equipment costs to

skyrocket. Southwest Oilfield Products offers the non-capex maintenance solution to prolonging the life span of existing

hydraulic fracturing pumps. Given capex cuts, oilfield service providers may resort to these meticulous and time-

consuming methods instead of ordering expensive new equipment.

“The fluid ends of hydraulic fracturing (frac) pumps must contain enormous pressure and move a large volume of

abrasive fluid that is high in solids content. Frac pumps were originally designed for intermittent service of no more

than six to eight hours per day. Today’s pumps operate many more hours per day, and careful maintenance of the

fluid ends is required for successful operation.”

“When valve covers are removed, they should be carefully inspected for nicks, scratches and burrs. Any identified

damage must be filed smooth before reinstalling. The valve access port’s sealing surface must also be smooth and

without nicks or burrs. Any valve cover seal requires smooth, clean surfaces for an adequate seal. Because of the

close fit between the valve cover and valve access port, care must be taken not to cock the cover or force it in when

reinstalling.”

“When installing new suction manifold O-ring seals, the groove and the mounting face of the fluid end must be clean

and free of nicks and burrs. The same can be said of the discharge flange seals.”

“Valve springs have a finite life and weaken during operation. As a spring becomes weaker, the valve is not pushed

down into the seat as quickly and “lags” above the seat. The valve is then slammed down on the seat by the

extension stroke of the plunger. This slamming action can damage the valve and the seat. To prevent this,

maintenance personnel should change the spring every time the valve is replaced.”

“Plungers must be thoroughly inspected for nicks and burrs. If any are found, they should be repaired before use.

Nicks or burrs in the plunger may result in reduced plunger packing life and possible leakage.”

“The plunger packing must be lubricated for proper operation. The lubrication lines to the plungers must be checked

to ensure that they are clear of all obstructions. Also, maintenance professionals must check the passageways in the

fluid end between the lube line connections and the stuffing box.”

“After a pump job is completed, the cylinders must be drained to prevent fluid end corrosion, particularly if the pump

will be idle for an extended time. Corrosion inside the fluid end can initiate stress risers where cracks can form.

Some pumps have suction manifolds equipped with cylinder drains.”

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“Fluid end modules, stay rods and studs must be inspected periodically for cracking. With fluid end modules, a visual

check is not always adequate because seeing cracks in the tight passageways in some fluid ends is difficult. Some

form of nondestructive testing should be used—such as magnetic particle testing or dye penetrant testing.”

Dec. 12 Unconventional Oil & Gas Center article

A slew of independent E&P companies and oil and gas services companies have begun slashing budgets. Capex budget

cuts will be at least 15% and could creep toward 20%. One investment bank does not expect the budget cuts to last

through the end of 2016.

“The big-budget slashing has begun in earnest. Independent E&Ps, among the most prolific out-spenders in the

industry, are feeling squeezed as crude prices drop and stress their leveraged portfolios. With prices still falling,

capex cuts are likely bigger than analysts initially expected.”

“David Tameron, analyst at Wells Fargo Securities said, ‘We had been looking for perhaps 13-15% reduction in 2015

capital versus 2014 levels,’ Tameron said in recap of the 2014 Wells Fargo Energy Conference that ended Dec. 10.

‘Based on what we heard at the conference, we now think that the number is at least 15%, and we could see levels

closer to 20%.’ Recently announced budget cuts range from hundreds of millions to billions of dollars.”

“E&Ps will ride out the worst of the oil collapse by narrowing focus, drilling less and counting less-expensive services.

ConocoPhillips (COP) was among the first major companies to say it would cut its budget after oil began a further

tumble in December. On Dec. 8, the company’s 2015 capital budget fell by $3 billion or 20% to $13.5 billion.”

“‘Despite a headline $3 billion cut, the trauma to discretionary spending is much smaller,’ said Pavel Molchanov,

analyst, Raymond James Equity Research. ‘Of the $3 billion, a sizable portion not [precisely disclosed], but we think

over half is on “autopilot,” in the sense of spending that’s rolling off on soon-to-be-completed long-lead-time projects

in Australia, the Canadian oil sands and Malaysia,’ Molchanov said.”

“In early December a slew of companies announced that spending was being slashed, though production would rise

anyway. Oasis Petroleum Inc. (OAS) said it would reduce capex by 44% in 2015. OAS said its initial 2015 capex plans

were $750-$850 million with annual production growth of 5-10%. The company’s capex guidance for 2014 was

roughly $1.43 billion, according to a May investor presentation.”

“‘Such reductions will be the norm in the Bakken,’ said Drew Venker, analyst, Morgan Stanley & Co. LLC. ‘While

activity high-grading may push this out to mid-2015, we believe peers will follow suit, spending closer to cash flow

and lowering production volumes.’“

“Bill Barrett Corp. (BBG) leaders said the consensus capex for the company is too high. BBG is running several

scenarios to establish its spending by January. BBG’s 2014 budget is an estimated $560-570 million. Tameron said

Wells Fargo models consider about $188 million of its 2014 spending as discretionary. BBG’s final plan will likely

reflect a conservative view toward outspending. ‘It’s possible capex could come in below $475 million,’ Tameron

said. ‘Weakening E&P budgets are building in expectations that service costs will dip by about 10%-20%,’ Tameron

said. ‘However, such discounts reflect Q4 2015 versus Q4 2014 pricing. Months will pass before rates are

renegotiated.’“

“Halliburton (HAL) said on Dec. 10 it would revise its 2015 expectations and lower guidance for the Q4 of 2014, said

analysts John Freeman and Andrew Coleman, Raymond James. The company expects North American Q4 revenues

to remain flat quarter over quarter, Freeman said. ‘Bottom line: This downward guidance revision isn’t unexpected,

and we would expect similar slowed growth rates from other diversified service companies,’ Freeman said.”

“However, Tudor, Pickering, Holt & Co. doesn’t expect lower costs to last or help long-term. Oil service costs will be

lower for at least 2015 and likely 2016. But if E&Ps are able to realize a 15-20% cost reduction by late 2015, oil

service profits fall to unsustainably low levels. ‘If held there, that would result in equipment [and] companies falling

out of the market and in turn tightening supply-demand of services,’ the firm said.”

Additional research by Emily Carr, Janis Johnson and David Wright.

The Author(s) of this research report certify that all of the views expressed in the report accurately reflect their personal views about any and all of the subject securities

and that no part of the Author(s) compensation was, is or will be, directly or indirectly, related to the specific recommendations or views in this report. The Author does not

own securities in any of the aforementioned companies.

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