Drillers Fighting for New Life



Drillers Fighting for New Life
For the oilfield services industry, it's no longer about merely navigating a downturn.

(Bloomberg) -- For the oilfield services industry, it’s no longer about merely navigating a downturn. It’s now about survival.

Five years after crude began its plunge to less than $30 a barrel from more than $100, the companies that drill and frack wells are living in a new world. The producers they work for have become increasingly efficient and cost-conscious, reacting to shareholder demands for payback and a crude market that’s recovered only part of that brutal decline.

Meanwhile, the service companies that handed out discounts in the downturn are barely holding on. Schlumberger Ltd. and Halliburton Co., the two biggest, have each fallen by more than 65% since crude started tumbling, and Weatherford International Plc on Monday filed for bankruptcy. Contrast that with the oil producers, collectively down less than 50%.

It’s a model that “definitely needs to be changed," said Luke Lemoine, an analyst at Capital One in New Orleans, in a phone interview. "It’s just been capital destruction for 20 years."

Oilfield service providers have a long history of riding the ups and downs in the energy market. They ramp up rigs, workers and prices when oil is more expensive, and cut back when the market drops.

Gear Pile-Up

When crude began recovering in March 2016, the servicers started refortifying. But with their customers keeping a lid on spending, the gear began to pile up. In February, Rystad Energy, an industry consultant, estimated that supplies of U.S. fracking gear -- the pumps that blast water, sand and chemicals underground to release crude in what has become the most expensive part of drilling -- will exceed demand by about 68% by year’s end.

At the same time, producers have enjoyed an output boom in recent years, doing more with less by using new methods and technology. Shortened horizontal drilling times and longer laterals that require fewer wells to be drilled are taking a toll on servicers.

In June 2014, the U.S. pumped 8.4 million barrels of crude using 1,545 drilling rigs. Last month, it produced about 12.2 million barrels, 45% more, with just 788 rigs.

"I have an industry that’s built for way more work than we are currently doing, or that we think will be done in the foreseeable future – or at least the next three or four years," said Richard Spears, an industry consultant who’s also worked in and around the oil patch for decades.

The gear glut is taking a toll as service companies are jockeying to defend their share of an increasingly lean market. The prices charged by service companies are at their lowest levels since September 2016, with more companies dropping prices than raising them, according to data from the Federal Reserve Bank of Dallas. The servicer price index hasn’t risen for at least a year, the bank’s quarterly surveys show.

While large companies such as Schlumberger and Halliburton are struggling, smaller companies are facing dire consequences. Weatherford, in filing for bankruptcy, is seeking protection at a time when its debt load has topped $8 billion. National Oilwell Varco Inc., meanwhile, is cutting expenses to the bone.

"A major value transfer is underway between oilfield service companies and E&P entities," James West, an analyst at Evercore ISI, wrote in a report earlier this year. "Rather than seek to preserve value, companies sought greater market positioning despite the structural predicament. Intense competitive conditions exist in almost every major oilfield service product line."

Over the last decade in particular, oil servicers went from a 13% lead over exploration and production companies when it comes to returns on capital employed, to a 7% deficit to the E&Ps last year, according to slides from Evercore ISI in February, when the bank called on service companies to take its pledge to generate returns for shareholders.

Earnings Drop

During the same period, the biggest oilfield service and equipment companies have spent $88 billion while earnings have dropped by $5.8 billion, and net debt has climbed by $24 billion, according to Evercore.


12

View Full Article

WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.

AH  |  July 05, 2019
The rig count has nothing to do with barrels produced, unless they're having a 100% successful drilling discovery rate or they're all developing fields and we all know this certainly isn't the case. Not to mention we also need to look at what rig numbers are taking on P&A programs.. plastics has nothing to do with bottom lines, we are all to fond of making year on year profits along with continual growth, which by the way isn't sustainable, it's just greedy shareholders refuse to accept this fact and we are now living it but refuse to accept it.
Jk  |  July 03, 2019
Oilfield service companies working on a day rate basis are in effect laborers on the revenue side but, unlike an individual wage earner, are required to shoulder full business risks on the opex and capex side. The current day rates offered do not come close to compensating for these risks. Being a commodity business they quite possibly will not again unless in case of some hydrocarbon-supply emergency. And by definition emergencies do not last.