Barclays’ coverage initiation on the oilservice sector last week could very well be summed up in two words: budget cuts.

The London-based banking company says approximately 90% of the oilservice group is historically correlated to oil prices, and the dropping price will result in reduced budgets for E&Ps in the upcoming year. With less available capital for E&Ps, the oilservice companies will be affected by the ripple effect of dialing back operations.

According to a survey of 225 companies in Barclay’s annual E&P Spending Outlook, global spending will decline by 8.8% in 2015. “However, because these budgets assumed oil prices would average $70/bbl Brent & $65/bbl WTI this year, we expect spending to trend even lower,” says the report.

Guidance issued by companies thus far certainly agrees with Barclays’ assessment. In a series of news releases compiled by EnerCom, only four out of 26 companies who have released guidance for 2015 are expecting to increase year-over-year spending. The average guidance of the 26 companies is 27% below their 2014 budgets. Some of the largest cuts are coming from ConocoPhillips (20%), Continental Resources (33%), LINN Energy (53%) and Oasis Petroleum (44%).

Source: Barclays

Source: Barclays

Service costs expected to fall more than 10%

E&Ps are exploring every option to preserve capital, and that may include reducing rig counts, negotiating new contracts or postponing certain projects. As such, Barclays believes service costs will drop by more than 10%, according to information from the survey. The information is a “complete reversal from 2014, where 35% of E&Ps indicated costs increased more than 10%.”

The majority of capital reductions is expected to occur in North America – the projected totals are expected to decrease by 14.1% and has even more downside, says the report. Spending may decline by as much as 30% if oil stays near the $50/barrel mark. The decline in international spending, on the other hand, is only expected to be “modest.”

Source: Barclays

Source: Barclays

The United States land rig count is expected to fall by 500 rigs over the course of the year, which would equate to approximately 25% of the current count, according to information from Rigdata. Barclays expects the Bakken Shale and Permian Basin to receive the majority of the reductions, which will likely begin in Q2’15. The dwindling rig count may result in an even greater reduction in service costs – possibly as much as 20%. Natural gas is not exempt. Barclays also believes gas-focused rigs will fall by 20% within the year due to natural gas spot prices falling “in sympathy” with its oil counterpart.

In the meantime, Barclays expects the Gulf of Mexico to be a “stable” market in the near-term. Several projects are ramping up and adding to operational activity. OAG360 provided a Gulf update last week in a feature article.

Will the Sector Rebound in 2016?

Barclays notes companies have reduced their year-over-year capital only seven times during the 30-year history of the annual E&P Spending Report, and spending increased by more than 10% almost every following year.

To meet that trend in 2016, the market will first have to navigate a field that has become accustomed to oil in the $90 to $100 range, says Barclays. As of Q3’14, the report says small to mid-cap companies had hedged only 32% of 2015 oil volumes, down from 46% in 2014 and 47% in 2013. Large cap companies were even lower at 14% of volumes for 2015. Continental Resources monetized all of its hedges in November 5, 2014, resulting in an initial profit of $433 million. The price of oil closed at $50.04 on January 5 – more than $28 below the price when CLR first made the announcement.

E&Ps may be cutting back on domestic spending, but national oil companies are maintaining expenditure rates on the international scene. Barclays expects national companies to reduce spending by only 1% in 2015, while independent companies in both the United States and Europe are expected to trim costs by more than 12%. Saudi Arabia and Kuwait, on the other hand, are projected to increase spending by more than 15% for the second straight year. The Saudi rig count is the highest in decades, and Barclays says the kingdom plans on ramping up production even more.

Although the new market will have its challenges, Barclays does not expect the oil price collapse to be as difficult as the 2009 episode. The report says large cap companies are better positioned financially to withstand the downturn. The company believes the shale boom is still in the early stages, and producers will continue to maximize their returns through increased knowledge of the plays.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

Legal Notice