Two of the three largest oil rig operators and frackers are considering pulling back from the North American market as losses mount.
(Bloomberg) -- Two of the three largest oil rig operators and frackers are considering pulling back from the North American market as losses mount.
Schlumberger Ltd. -- after posting its first North American operating loss since at least the turn of the century, according to Barclays Plc -- is evaluating whether it’s worth temporarily shuttering its business in the region. Baker Hughes Inc. said Wednesday it has decided to limit its exposure to unprofitable onshore fracking work in North America because of the "unsustainable pricing."
It’s the first time in at least a decade that those companies and Halliburton Co., the big 3 in oil services, all lost money in the region during the first three months of the year, according to Bloomberg Intelligence.
"Activity is coming down to basically critical-mass type of levels," Schlumberger Chairman and Chief Executive Officer Paal Kibsgaard told analysts and investors Friday on a conference call. "What’s the benefit of taking the losses versus shutting down and then making the investments later on to start back up again?"
Even FMC Technologies Inc., the largest provider of subsea equipment to the industry, said Wednesday the amount of lost work in the region was surprising.
The oil service and equipment companies were the first to feel the pain since crude prices began falling in 2014, and they’ve contributed the largest share of the more than 250,000 jobs cut during the downturn.
"It’s a pretty dire situation right now in the oil services market," J. David Anderson, an analyst at Barclays in New York, said Wednesday in a phone interview. "The next step here is literally shutting down operations."
As companies report first-quarter results, laments about the "unsustainable" business in North America is a common refrain among service providers.
"We’ve been hearing one version or another of that word for some time now, and I think a lot of people just dismissed it," Barclays’ Anderson said. "Companies are forced to take these losses right now. Otherwise, when this eventual recovery happens, they’re not going to be able to respond. That’s what they have to weigh."
Jeff Miller, president of Halliburton, was one executive using the word this past week to describe operations. "My definition of an unsustainable market is one where all service companies are losing money in North America, which is where we are now,” he said Friday in a statement in which the Houston-based company reported an operating loss margin of 2.2 percent.
The market for hydraulic fracturing, which blasts water, sand and chemicals underground to free trapped hydrocarbons, is seen as a proxy for oilfield service activity in North America, where producers in the shale plays use the technique to produce crude.
More than half of U.S. fracking equipment, measured at a total of 17.5 million horsepower, is unused, according to consultancy IHS Inc. Prices charged for fracking are estimated to have fallen as much as 40 percent since the downturn began in the third quarter 2014, Caldwell Bailey, senior consultant at IHS in Houston, said Wednesday in a phone interview.
"They can’t cut costs any more," Anderson said. "You’re at the muscle and the bone. If I cut from here, I’m impairing myself on the upside."
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Copyright 2017 Bloomberg News.
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