So, here we are, biding our time with our core oil portfolio, watching oil idle in the mid-$40’s and as the John Mayer song goes, “Waiting on the World to Change”, send oil back upwards through $50 and our stocks with it. We’re no longer looking for new ideas for our portfolio or grand scheme changes, instead, let me give you one more reason we remain confident in our portfolios and convinced they’re solidly positioned for the long haul – the oil services group.
Nowhere has oil and gas been more decimated than in the oil services subsector. While Exploration and Production companies have gotten the most attention, with their inherent stresses of debt and reserves, breakeven costs and well completions, the oil services companies have had arguably an even tougher time.
That’s because their services are the first that are cut back during an oil price recession, like the one we’ve been experiencing since the Fall of 2014. Oil production depends upon continued renewal of resources, both in finding and completing new wells. But in a deep oil recession, producers are forced to hunker way down and decrease or completely eliminate new projects, while concentrating capital on getting the most out of existing ones. Whether those resources are conventional or non-conventional; onshore or offshore; sweet, sour or bituminous, the budget for oil services has continued to plummet.
This has been disastrous for particularly the…
So, here we are, biding our time with our core oil portfolio, watching oil idle in the mid-$40’s and as the John Mayer song goes, “Waiting on the World to Change”, send oil back upwards through $50 and our stocks with it. We’re no longer looking for new ideas for our portfolio or grand scheme changes, instead, let me give you one more reason we remain confident in our portfolios and convinced they’re solidly positioned for the long haul – the oil services group.
Nowhere has oil and gas been more decimated than in the oil services subsector. While Exploration and Production companies have gotten the most attention, with their inherent stresses of debt and reserves, breakeven costs and well completions, the oil services companies have had arguably an even tougher time.
That’s because their services are the first that are cut back during an oil price recession, like the one we’ve been experiencing since the Fall of 2014. Oil production depends upon continued renewal of resources, both in finding and completing new wells. But in a deep oil recession, producers are forced to hunker way down and decrease or completely eliminate new projects, while concentrating capital on getting the most out of existing ones. Whether those resources are conventional or non-conventional; onshore or offshore; sweet, sour or bituminous, the budget for oil services has continued to plummet.
This has been disastrous for particularly the smaller oil service companies that depend most upon new drilling orders to survive. Further, this drop in work for all of the services companies has been followed by a brutal and mercenary cost competition for the work that does remain – most services companies have cut their core charges by more than 50% in order to retain customers. Thousands of workers have been cut and rig machinery has been idled: IHS estimates that 70% of fracking machinery sits underutilized and 60% of the fracking workforce has been laid off.
As bad as bankruptcies have been with E+P’s, in oil services it has been worse: 70 chapter 11 oil services company filings have been made since the start of 2015.
Now, fast forward to the resurgence of oil prices here towards $50, which is, according to some analysts, about to threaten the drop in oil production that we are just beginning to see:
Sure, they say – there’s definitely a measurable slackening in US production, but with the increased efficiencies and lowered breakevens that most E+P’s are claiming, we’re just going to see another raft of shale wells “turned on”, with a recurring market glut. It’s what Goldman Sachs, for example, has been recently quick to point out.
Besides the case I’ve made previously that the E+P’s no longer have the capital confidence to ‘relight’ their drilling dreams, the oil services companies pose another obstacle to a quick turnaround in production – and that’s whether prices hit $50, $60 or even $70 this year.
They just don’t have the immediate capacity for a big drilling boom any more.
To understand just how hamstrung they’d be even if prices were to rapidly recover, you’d need to look at the smaller players. Don’t rely upon reports from the large ones like Halliburton (HAL), who, despite laying off 28,000 workers, were better equipped to keep many of their specialists during this downturn. When the market completely turns around, they won’t lag much in getting back into the field at full force. But look at a player like Key Energy Services (KEG), a fracking specialist that has already drawn out plans for a reorganization as their stock hovers around $0.20, after seeing prices at $10. They’ll need not just a resurgence in oil prices to try and reconstitute their workforce and balance sheet, but a turnaround in the fees that all oil services companies are currently charging – and a big one at that. That makes the likelihood of companies like KEG being around and functioning robustly, even if oil prices reach $80 a barrel again, fairly grim.
All of this points to a very, very slow turnaround for oil services in general – and therefore a very slow turnaround in the production capabilities of US independent oil producers, no matter WHERE prices go.
Which makes those that ARE able to produce oil and increase production in the coming year or two even more of a premium hold stock to have – precisely the ones we have been accumulating. Things may look slow now and taking a bit of a pause, but the plight of the oil services companies is telling me we are on the right track with our long-term portfolio choices.
