The giants of the oilservice industry kicked off earnings season last week. The viewpoints of multi-billion dollar companies like Halliburton (ticker: HAL), Schlumberger (ticker: SLB) and Weatherford (ticker: WFT) are unique, given that the companies provide an insider’s perspective on industry activity based on what they are experiencing firsthand in the field.
The oilfield services sector has appeared to bear the brunt of the ugliest side of the commodity downturn. HAL and SLB both beat street estimates in their Q1’15 results, but several extra million in revenue came from cutting the jobs of thousands of workers. Those two companies, along with WFT and Baker Hughes (ticker: BHI), have collectively slashed more than 40,000 jobs in response to a weaker drilling environment. And these were companies who saw their margins significantly outpace the drop in rig counts.
The conclusion reached by several investment firms was that the 600-lb. oilservice gorillas gained market share, which could lead to a black-and-blue earnings season for some of the smaller players in the service field.
“A Tough Couple of Quarters”
“One of the reasons you see market share gains from some of the big guys in the downturn because all of a sudden they have all this extra capacity and they’re competing against the smaller guys,” said David Anderson, Senior Equity Analyst for Barclays, in an interview with Oil & Gas 360®. “Since HAL is the low cost operator, it doesn’t matter what price they go at. They have the ability to take the competition down to cash costs and will continue to make money, but for everybody else it’s going to be a tough couple of quarters.”
Halliburton still reported a net loss of $643 million in Q1’15, with management pointing to “historically high” downturn speeds and an extremely competitive market. “We’re seeing substantial pricing pressure in all of our product lines, and a significant amount of service capacity is looking for work,” said Jeff Miller, President of Halliburton, in the company’s Q1’15 call.
Source: EnerCom’s Monthly Report – April 2015
Rig Count Lowest since Oct. 2010, Down 50% in 12 Months
Early indications from E&Ps and oilservice companies alike are that service costs have dropped roughly 20% compared to previous rates. The United States rig count of 932, meanwhile, is at its lowest level since October 2010 and is nearly half the amount compared to April 2014. That has led to oversupply in the service market and companies grappling to maintain their positions.
“There’s clearly going to be a tremendous amount of excess capacity in pressure pumping, there’s no doubt about that,” said Anderson, adding that rig count numbers will likely climb back into the 1,200 to 1,400 range. “That’s still quite a bit lower than the peak of 2,000 (in 2011), but you are going to see greater efficiencies, so the question is where will the well count go from here?”
Source: EnerCom’s Monthly Report – April 2015
Joint Ventures or Collaboration Among Oilservice Companies?
Anderson mentioned he has heard rumblings of possible joint ventures or agreements between service companies regarding more monetized services (water handling, for example), but finalizing such agreements would be difficult because of the independency of the markets. That being said, he doesn’t expect to see companies closing the doors for good – at least in the short term.
Anderson explains: “I do think we’ll see a lot of idle equipment, and some pretty awful numbers from a lot of the smaller companies, and that’s going to be key because this equipment doesn’t go anywhere even though it needs to. So is there going to be a consolidator in the pressure pumping market? We’ve never seen it – it would be great to see but we don’t have huge hopes for that.”
Although the consolidation or of smaller oilservice providers is not immediately evident, such companies are financially pressured in a lower-margin environment. A handful of E&Ps, along with the Energy Information Administration, expect West Texas Intermediate prices to remain below $60 on average in 2015. Scott Sheffield, Chief Executive Officer of Southwestern Energy (ticker: SWN) said U.S. production cannot maintain its upward trend at $60/barrel. Anderson believes a stable $60 oil price would make oilservice stocks essentially range bound. “If the oil price remains stable like that, the question is; do earnings still grow from here?” Anderson asked. “You’ll have to become even more efficient, and I believe you’ll see a slow growth market as costs continue to get better.”
When will the Healing Process Begin?
Halliburton management said the decline from peak to trough has typically taken about three quarters, meaning Q2’15 will likely be another difficult period for the industry. “Once we see activity stabilize, the healing process can begin, but it takes time,” said Miller, explaining that the environment is improving but not calling the improvements a recovery. “Our input costs can then start to catch up with service pricing declines, and our efficiency programs and well solutions can start driving margins upwards.”
Can Oilservice Providers Rely on Re-Fracs to Pull Them Through This?
Halliburton Re-Frac Case Study – 2013
One of the drivers moving forward is the opportunity for re-fracturing wells, with Miller saying he sees the method as a natural extension with the maturing of unconventional wells over time. An added benefit is the ability for activity to quickly ramp up in North America through increased efficiency and constantly improving technology. “The U.S. unconventional business is now the lowest-cost, fastest to market incremental barrel of oil available in the world today,” said Miller. “We’ve helped our unconventional customers prove over the years that they’re smart, technically savvy and very adaptable companies, and I’m confident that this type of market will show that again.”
Paal Kibsgaard, Chief Executive Officer of Schlumberger, said there are thousands of North America wells prospective for re-fracturing, with billions in terms of revenue opportunities over the long term. He believes an agreement can be reached with E&Ps that would allow SLB to get paid back in production after “footing the bill” for the re-frac work.
New Operating Models Will Emerge
Improvements in cooperation and collaboration were key points of David Rabley, Vice President of Schlumberger Business Consulting, in an interview with Oil & Gas 360® last month. “Efficiency is lagging in our industry,” said Rabley. “Producers don’t want to leave value on the table, so I believe the current situation creates an opportunity for a few new operating models to come up, such as re-fracs and other innovations that are more relevant in a down-cycle environment.”
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Barclays Disclosures:
- Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from HAL in the past 12 months.
- Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from HAL and SLB within the past 12 months.
- HAL is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
- HAL is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate.
- HAL and SLB are, or during the past 12 months have been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate.
