As the Baker Hughes rig count ticks upwards, oilfield services providers (OFS) are seeing a much-awaited revenue rebound in the heart of the United States’ most prominent drilling areas.
Spending on exploration activities in the final quarter of 2016 will be approximately $1 billion higher than previously expected, according to Jud Bailey, an analyst from Wells Fargo, who made the forecast in a note to investors earlier this month.
The strong recovery should carry over into 2017 – especially since the Organization of Petroleum Exporting Countries’ (OPEC) agreed on a production freeze on Wednesday that caused oil prices to spike by 20 percent. These gains will add ammunition to oilfield service providers’ demands for higher payouts than originally agreed to when markets were hyper-bearish, Samir Nangia, an analyst with the United Kingdom-based IHS Energy Insight, told Fuelfix earlier this week.
West Texas Intermediate (WTI) prices have jumped by more than $5 per barrel this week, which means that drillers in the Eagle Ford and Permian Basins are beginning to see recovering revenues that will likely end up in the pockets of long-struggling oilfield servicers in the coming months.
The hopeful news comes at a critical time: according to a recent Haynes & Boone analysis, bankruptcies in the oilfield services sector have boomed from about 20 last September to as much as 100 as of November. In October, eight oil field service providers filed for Chapter 11 restructuring.
The same research estimates that the cumulative debt of U.S. oilfield servicers reached a whopping $14 billion in September.
The delayed translation of drilling profits to gains for OFSs has caused debt to accumulate quickly, and banks were starting to close credit lines to the ailing sector.
As Calgary-based OFS executive David Yager outlined for OilPrice.com last week, the only financial statements relevant to lenders are for the last two years, which have notoriously been in a state of continuous decline—especially for oilfield servicers. Related: U.S. Oil Rig Count Climbs To A 10-Month High
Debt markets have also clamped down on operating lines of credit secured by accounts receivables. Receivables from credit worthy oil and gas company clients is about the closest thing to cash that a company has. Historically, this has been the easiest asset class to borrow against – but this is no longer the case.
As a new wave of cash floods into the remaining OFS firms, the sector looks to be on track to restore its credit relationships and begin new employment drives in struggling oil sector job markets in Texas and other drilling regions.
Some of the workers may now be unavailable for rehire, though. After two years of job hemorrhages, it is likely that at least some of the most qualified candidates have moved on to more stable fields.
In the United Kingdom, two oilfield workers started a brewery with the goal of hiring other former oil industry staff, according to today’s report by Rigzone.
“We both left [the oil sector] of our own accord, disheartened with the industry, and we loved brewing,” Dave Grant, formerly from the Expro Group, said. Related: Non-OPEC Producers To Cut An Additional 600,000 Bpd Next Week?
The pattern is not limited to the other side of the Atlantic Ocean, according to Les Csorba, who predicted in May that millennial workers were especially likely to abandon oil and gas due to the crisis – leaving companies with an aging baby boomer workforce on the edge of mass retirement.
“Obviously we are going to see a number of defections from the energy industry,” the analyst from Houston-based Heidrick and Struggles said. “Young people that came into the business are now leaving because they are afraid of the cyclical nature of the industry.”
If young workers really have jumped ship at the rate feared by industry analysts, the return of U.S. drilling could not have come any later.
By Zainab Calcuttawala for Oilprice.com
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