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Credit Markets Have Oilfield Services In A Lockdown

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Has The Long Awaited Recovery Of Texan Oil Started?

Texas Oil

Some positive signs indicate the long-awaited recovery in the Texas oil and gas industry may finally be on the way. But the climb back out of the hole dug since the price collapsed from over $100 in July 2014 to the $30 lows of January-February 2016 will be slow, and full recovery could take years, if it happens at all.

Texas crude oil production in 2016 increased in August by 0.5 percent from last year, to 2.4 million barrels a day, according to the Railroad Commission of Texas. Total crude and condensate production for August was 2.7 million barrels a day.

After years of lay-offs leading to a partial collapse of the Houston housing market and other economic woes, industry experts see employment prospects in Texas improving. The Texas Workforce Commission reported that two-hundred and fourteen thousand Texans worked in the upstream sector as of September 2016. The figure marks a significant decline from two years ago, but also indicates that upstream hiring is picking back up.

Schlumberger, the ailing services company, announced last week modest third quarter profits and together with Halliburton announced that layoffs had ceased as of June 2016. Together the two companies axed 85,000 jobs in eighteen months. Total lay-offs in Texas topped out at over 350,000 in May 2016.

Activity in the Permian Basin, the large west Texas shale play that is currently the locus of the national shale oil and gas boom, continues to be robust. Drilling rigs are being added more quickly in the Permian than elsewhere, with the EIA’s albeit confusing figures for October showing production there growing steadily, in marked contrast to the decline being experienced by other shale plays. M&A activity is strong, with thirteen publicly announced transactions in the second quarter among Permian upstream participants, with an average value of $17,000/acre.

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Access to capital in the Permian is much better than it elsewhere, which is leading to a lopsided recovery. While upstream activity in shale has proven robust, offshore production and investment is lagging behind. FMC Technologies, an offshore equipment company, announced a further one thousand layoffs and declining profits even as Schlumberger reported its modest gains for the quarter. The company has cut 5200 jobs since 2014 and will likely announce further cuts at the end of the year.

This is no surprise; recovery in offshore is always much slower than among onshore producers. But it speaks to the continued vitality of fields like the West Texas Permian.

Overall, the picture for Texas, the center of the American oil and gas industry, remains grim. ConocoPhillips, a huge American producer, announced third quarter losses of $1 billion, down from $1.1 billion losses this time last year. The company has cut about $300 million in capital expense as its shifts from offshore to shale, and cut another $300 million in operating costs. Despite the losses, the company’s share price ticked upwards on the news, indicating some confidence that the tough times are largely behind it.

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Baker Hughes, another large services company and a distant third behind Halliburton and Schlumberger, cut another two thousand jobs in the third quarter as it moved to reduce costs. So far it’s cut about $500 million, and its goal is to reach $650 million in savings by the end of the year. The company’s losses for the third quarter were $429 million, compared to a $911 million loss last year. It’s payroll has been practically cut in half since 2014, from sixty-two to thirty-four thousand employees, though in September it cut employee pay as a way to avoid further reductions in staff.

The simplest reason for the slow recovery is the recent uptick in prices beyond $50. Higher prices and the recent moves by companies to stall collapsing profits, cut losses, shed employees and increase savings has given the industry greater confidence that the worst is behind them. But it’s not time to celebrate quite yet. Prices could still fall amidst the on-going supply glut; moves by OPEC or other international producers could send the market down again; things could get worse before they get better.

By Gregory Brew for Oilprice.com

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