Clouds have been clearing for oil producers in the U.S. oil patch, but it looks like things are a bit different in oil field services. In fact, they’re quite a bit different: according to a recent Haynes & Boone analysis, bankruptcies in the oil field services sector have boomed from about 20 last September to as much as 100 as of last month. In October, eight oil field service providers filed for Chapter 11 restructuring.
Also, according to Haynes & Boone, the total cumulative debt of U.S. oil field service providers reached US$14 billion as of this September.
In absolute terms, the number of bankruptcies among E&Ps and their combined debt is higher than the figures for oil field service providers. The bankruptcy filings in the two sectors are almost equal, but in production, the rate of new filings has slowed down considerably in the last few months, while in oil field services it has accelerated.
Debt levels for E&Ps are also higher, considerably, at a total of around US$68 billion. This, however, doesn’t seem to bother many of them as they bask in higher international oil prices and continue to add new drilling rigs. Two weeks ago, the active rig count marked its eight week of increases in a row, with as many as 11 new additions.
This should be wonderful news for oil field services, but it looks like the news is coming too late.
Like E&Ps, oil field service companies had been borrowing heavily while the going was good; when prices crashed, the debt burden started to get unmanageable, and fast. What proved to be the main problem for players in this sector were the discounts to their services they were forced to make to stay in business, and the shorter contracts they had to agree to with E&Ps.
This has benefited producers, allowing them to save quite a lot of money on drilling and maintenance services, and allowed them to boast “efficiency improvements”, but it has been deadly for many service providers. What’s more, according to a Wood Mackenzie analysis reported by the Wall Street Journal, many of the E&Ps that filed for bankruptcy over the last year and a half have continued to pump crude at the same rates they did before their Chapter 11 filing. In other words, it has been business as usual for them, apart from the debt restructuring that’s provided them with some much-needed breathing room. Related: Oil Jumps After EIA Reports Draw To U.S. Crude Stocks
This magic trick is much harder for oil field service providers to pull off, which may be a big part of the reason they have fared poorer than their upstream business partners.
The last oil field service company to file for bankruptcy was Basic Energy Services, a Texas-based company with debt of US$1.2 billion and assets worth US$1.1 billion. The company had issued a prior warning that it would be unable to survive if it could not find a way to restructure its debt and reduce its load.
The leaders of the pack—Baker Hughes, Halliburton, and Schlumberger—have been doing better, but only with massive cost cutting, major discounts for their services, and thousands of layoffs. If the rate of bankruptcies continues in oil field services, it’s likely that only the bigger players will remain, and this may come back to haunt E&Ps when prices improve more, which is bound to happen¬—eventually. E&Ps will then likely have to pay through the nose for what they now get from service providers for the industry equivalent of small change.
By Irina Slav for Oilprice.com
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