• 1 day Shell Oil Trading Head Steps Down After 29 Years
  • 1 day Higher Oil Prices Reduce North American Oil Bankruptcies
  • 1 day Statoil To Boost Exploration Drilling Offshore Norway In 2018
  • 1 day $1.6 Billion Canadian-US Hydropower Project Approved
  • 1 day Venezuela Officially In Default
  • 2 days Iran Prepares To Export LNG To Boost Trade Relations
  • 2 days Keystone Pipeline Leaks 5,000 Barrels Into Farmland
  • 2 days Saudi Oil Minister: Markets Will Not Rebalance By March
  • 2 days Obscure Dutch Firm Wins Venezuelan Oil Block As Debt Tensions Mount
  • 2 days Rosneft Announces Completion Of World’s Longest Well
  • 2 days Ecuador Won’t Ask Exemption From OPEC Oil Production Cuts
  • 3 days Norway’s $1 Trillion Wealth Fund Proposes To Ditch Oil Stocks
  • 3 days Ecuador Seeks To Clear Schlumberger Debt By End-November
  • 3 days Santos Admits It Rejected $7.2B Takeover Bid
  • 3 days U.S. Senate Panel Votes To Open Alaskan Refuge To Drilling
  • 3 days Africa’s Richest Woman Fired From Sonangol
  • 3 days Oil And Gas M&A Deal Appetite Highest Since 2013
  • 3 days Russian Hackers Target British Energy Industry
  • 3 days Venezuela Signs $3.15B Debt Restructuring Deal With Russia
  • 4 days DOJ: Protestors Interfering With Pipeline Construction Will Be Prosecuted
  • 4 days Lower Oil Prices Benefit European Refiners
  • 4 days World’s Biggest Private Equity Firm Raises $1 Billion To Invest In Oil
  • 4 days Oil Prices Tank After API Reports Strong Build In Crude Inventories
  • 4 days Iraq Oil Revenue Not Enough For Sustainable Development
  • 5 days Sudan In Talks With Foreign Oil Firms To Boost Crude Production
  • 5 days Shell: Four Oil Platforms Shut In Gulf Of Mexico After Fire
  • 5 days OPEC To Recruit New Members To Fight Market Imbalance
  • 5 days Green Groups Want Norway’s Arctic Oil Drilling Licenses Canceled
  • 5 days Venezuelan Oil Output Drops To Lowest In 28 Years
  • 5 days Shale Production Rises By 80,000 BPD In Latest EIA Forecasts
  • 5 days GE Considers Selling Baker Hughes Assets
  • 5 days Eni To Address Barents Sea Regulatory Breaches By Dec 11
  • 5 days Saudi Aramco To Invest $300 Billion In Upstream Projects
  • 6 days Aramco To List Shares In Hong Kong ‘For Sure’
  • 6 days BP CEO Sees Venezuela As Oil’s Wildcard
  • 6 days Iran Denies Involvement In Bahrain Oil Pipeline Blast
  • 8 days The Oil Rig Drilling 10 Miles Under The Sea
  • 8 days Baghdad Agrees To Ship Kirkuk Oil To Iran
  • 8 days Another Group Joins Niger Delta Avengers’ Ceasefire Boycott
  • 8 days Italy Looks To Phase Out Coal-Fired Electricity By 2025
Alt Text

Oil Drillers Reopen The Fracking Debate

The debate surrounding fracking’s environmental…

David Yager

David Yager

Based in Calgary, David Yager is a former oilfield services executive and the principal of Yager Management Ltd., an oilfield services management consultancy. He has…

More Info

Pain For Oilfield Services Will Continue Even If Oil Prices Rebound

Pain For Oilfield Services Will Continue Even If Oil Prices Rebound

Despite the serial optimism that things will get better (because they can’t get worse) often expressed by this writer, the reality for oilfield services (OFS) is that even if oil prices rose tomorrow, it would take some time for activity to improve to the point where managers and owners could get back to selling things at a profit and making money.

While things looked better for a while in the second quarter when WTI traded again on the right side of US$60 a barrel, the loss of over one-third of this price in August set everyone back on their heels. The way three different OFS operators are dealing with the short-and medium-term market illustrates the enormity of the challenges ahead.

Global oilfield services giant Schlumberger Limited CEO Paal Kibsgaard expressed serious concerns about the near-term future when the company released its third quarter financial results on October 15. Schlumberger works in every market in the world in which it is permitted to operate. Therefore, “Big Blue” enjoyed some continuation of activity in various markets compared to North America where, when oil prices declined, operators demonstrated their ability to begin closing the spending taps almost immediately.

Schlumberger reported its third-quarter profit fell nearly 50 percent for the three months ended September 30, 2015 compared to the prior year. While most Canadian OFS operators have yet to report their third quarter results, it is safe to say most drilling and service contractors confined to North American markets would be thrilled to report Schlumberger’s year-over-year profit reduction. Revenue fell from US$12.6 billion in Q3 2014 to US$8.5 billion this year, a 28 percent decline. Profit fell to US$0.9 billion in 2015 from US$2 billion a year ago. Related: Is Oil Trending? How Twitter Influences Oil Price Volatility

Revenue from North American operations fell 47 percent from US$4.3 billion to US$2.3 billion. This is more in line with what OFS companies operating in Canada and the U.S. have been forced to deal with.

Bloomberg reported CEO Kibsgaard believes a recovery may not come until 2017. He said, “The market is underestimating how long this period is going to take. Just the fact that the industry is looking to again reduce investments when we have this significant pending supply impact coming, shows we have an increasing challenge.” While three months ago Schlumberger believed the worst might be over because of the rise in oil prices in Q2, now the services giant is looking at further staff reductions. The company has already eliminated 20,000 positions worldwide.

Even if oil prices were to rise tomorrow, the massive spending cuts worldwide would take time to reverse themselves, he noted. It will be a matter of confidence, not just price. “There is a delay, I believe, between an improvement in oil prices and the decision to increase budgets, and there’s going to be a further delay between increasing budgets and realizing that into higher oilfield activity. And then there’s going to be a delay in-between higher oilfield activity and higher production.”

Closer to home, Aveda Transportation and Energy Services Inc. announced on October 13 it had made major structural changes to ensure to the greatest degree possible it would be a survivor of the current downturn. Aveda trades on the TSX under the symbol “AVE.” It is a rig moving, trucking and rental company that operates in the U.S. and Canada. It would be just another trucking company were it not a project of OFS legend David Werklund of Canadian Crude Separators (now Tervita) fame, somebody who in his extensive career has seen more than a few major downturns in oilfield activity. Related: Is The Oil And Gas Fire Sale About To Start?

Aveda announced its president and CEO would be leaving the company and David Werklund would be taking over the top job. The company also announced in Q3 that it had eliminated 51 administrative and non-revenue generating positions, consolidated all executive functions from the U.S. in Calgary, closed a location in Texas and merged two Oklahoma locations into one.

Counting nickels is what oilpatch veterans like Werklund have learned to do over the years. Aveda is carefully watching overtime and is looking for more ways to cut staff compensation to help Aveda’s cost structure dovetail with market conditions. This also includes focusing sales efforts on core customers who will recognize Aveda’s commitment to quality operations and a safe work environment instead of a focus on price and price alone.

Although Aveda hasn’t announced its Q3 results yet, it had not yet experienced a severe drop in revenue to June 30. Revenue in the first half of 2014 was $67.5 million while this year it was $59.6 million. However, gross margin (revenue minus direct expenses or cost of goods sold) fell sharply from 20 percent in the first six months of 2014 to only 3 percent in 2015. It is unlikely the company will report any material improvement when it releases its results to September 30, 2105.

While Aveda had about $70 million in long-term debt at June 30, none of it was current. On the asset side, it had book value capital assets of $122.5 million and $34.2 million in accounts receivable. Short term liabilities, mainly trade payables, were only $14.1 million. Not only does the company have a strong balance sheet but Werklund is taking the necessary steps to ensure it stays that way.

Then it just gets worse. On October 14, Enseco Energy Services Corp. was forced to announce its principal lender, HSBC Bank Canada, had demanded immediate repayment of its loan and had issued a notice to enforce its security under the bankruptcy and Insolvency Act (Canada). Last summer, when Enseco announced its June 30 results, it advised markets it had been forced to negotiate a forebearance letter with its lender because it had defaulted on its major covenants. The board of Enseco has resigned. Related: Oil Prices Still Not Low Enough To Fix The Markets

Enseco, which specialized in directional drilling and well flowback services, had been hit particularly hard by the 2015 downturn. In the first six months of 2015 to June 30, revenue had fallen to $16.2 million from $35.8 million for the same period in 2014. Unfortunately, Enseco didn’t earn a profit last year (loss of $3.2 million to June 30, 2014) which likely made it harder to do so this year (loss of $4.2 million to June 30, 2015). At the end of Q2, the company reported current liabilities of $20.2 million (all its long term debt of $12.2 million was current) and current assets of only $5.7 million. While the company reported $21.1 million in book value property plant and equipment at June 30, how much of that could be liquidated in this market to settle debts is anyone’s guess. Enseco traded on the TSX under the symbol ENS.V. It last traded on October 13 at $0.015 per share and has now been halted.

Enseco will not be the only service company to have its loan called this year. The process is underway with others. It just had the misfortunte to be publicly traded so it had to tell everybody.

Nursing an oilfield service company with any debt whatsoever through a severe market downturn like this one is not easy. To get expenses under control, management has to be merciless. While it is very difficult for the staff who must be let go, it is in fact a job-preservation strategy for the rest of the staff, suppliers and equity investors. Better a sustainable job at reduced pay than a non-existent job at 2014 pay. Tough times require tough decisions.

By David Yager for Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News