The current running rig count of 809 in the United States is the lowest in five years, but analysts from Raymond James Equity Research believe we haven’t reached the trough yet. Not even close.

In a market report issued on October 5, 2015, the firm believes lower-than-expected drilling activity and a delayed rebound in commodity prices will drag the U.S. rig count to a low of 595 in mid-2016. The estimate is 28% below its estimated average for 2015 – far greater than its initial reduction estimate of 9%.

The Road Only Gets more Difficult for Oilservice Companies

Fewer rigs means fewer job opportunities and therefore greater competition in the oil service sector, where companies are already grappling with cost reductions in excess of 20%. Offshore operations have become even more scarce, and an oil price “head fake,” as Raymond James describes it, projects even further reductions in E&P spending and operating activity in the upcoming Q3’15 results. The firm believes nearly half of the companies in its coverage will post negative earnings in the quarter.

The bleak outlook carries into Q4’15, when yet another pullback is expected to take place. “We also do not expect management outlooks to be all that promising, said the report, adding that the looming budget season only adds to the lack of clarity. “As the misty clouds pass and more focus is shifted towards 2016, we believe this quarter’s earnings will likely shed light on how choppy coming quarters could be.”

Silver Lining: An Overshoot in the Downswing

Rigs by Oil Play

Rigs by Oil Play

An element of contango factors into the deepening rig count trough – Raymond James believes the steep pullback will result in pressure pumping activity “surging over 80% in 2017.” The outlook for offshore and international activity is not as promising, as the recovering onshore market and the cancellations of longer lead time projects will keep a lid on any kind of production gains.

A note from Wells Fargo Securities believes increased spending pullbacks and the massive layoffs may cause “long-term damage” to the industry, but the overshoot could lead to a quick oil price rebound in the not too distant future.

Hostile Takeovers Becoming Apparent

The prospects of an oil price recovery has turned the mergers and acquisitions sector of the oil industry into a cutthroat environment in recent weeks. Energy Transfer Equity (ticker: ETE) recently announced the $37.7 billion acquisition of Williams Companies (ticker: WMB) – a deal that seemingly was not well received by Williams shareholders, considering the company turned down a $53.3 billion initial offer that was perceived as “undervaluation.” Energy Transfer remained steadfast in its pursuit of Williams, alleging it was “fully committed” to finalizing a deal. Several analysts speculated ETE would opt for a hostile takeover if a deal was not reached with the WMB board.

Hostile territory was reached in the proposed merger of Canadian Oil Sands (ticker: COS) with Suncor Energy (ticker: SU). SU made an offer directly to COS shareholders on October 2, 2015, after failing on two separate occasions to strike a deal with the COS board. Suncor adhered to COS shareholders in its announcement, pledging better payout options to shareholders who lost 85% of their dividend as part of a cost cutting measure by Canadian Oil Sands.

Two major oilservice mergers are still underway and may change the landscape of the industry. The Baker Hughes (ticker: BHI) and Halliburton (ticker: HAL) merger is still trying to satisfy antitrust hurdles, and the Cameron (ticker: CAM) and Schlumberger (ticker: SLB) transaction is expected to close by year-end.

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