Last month, the world’s fourth-largest oilfield services company, Weatherford, said that it would begin financial restructuring to significantly cut its long-term debt of over US$7 billion. Weatherford expects the restructuring agreement to be implemented under a ‘pre-packaged’ Chapter 11 process and expects to file U.S. chapter 11 proceedings.
The financial struggles of the world’s fourth-biggest oilfield services provider after Schlumberger, Halliburton, and Baker Hughes should flash a warning sign for the oilfield services industry, which has suffered the most through the downturn and continues to suffer today, Dan Eberhart, CEO at privately-owned U.S. oilfield services company Canary, wrote in an article for Forbes.
Even after oil prices recovered from the 2015-2016 lows and exploration and production companies returned to drill more, oilfield services were struggling to achieve good profit margins, because the much-touted productivity gains for upstream operators, especially in U.S. shale, came at the expense of business losses for the oilfield services industry, according to a Deloitte insight from April 2019.
Higher well productivity, multi-pad drilling, and other productivity and technology advances actually led to lower day-rates for rigs and wells completions performed by the oilfield services companies, Deloitte’s Anshu Mittal and Andrew Slaughter said.
The OFS sector was finally seeing the light at the end of the tunnel in the second half of 2018, but then came the Q4 oil price plunge, which made U.S. shale companies scale back investment plans for 2019 and stick to capital discipline as shale investors became increasingly irritated with the lack of returns and profits amid soaring record-high U.S. oil production. Related: Trump’s Multi-Front War That Spooks Oil Markets
Not everyone in the shale patch profited from the higher oil prices earlier this year, the continuously rising oil production in the Permian, and the record U.S. crude output. Experts and analysts expect that more third-tier indebted companies across the U.S. shale patch will come under financial distress this year—a trend that’s not immediately visible when one looks at the record American oil production.
While larger players, including supermajors Exxon and Chevron, are expanding their Permian presence and aim to grow production volumes significantly over the next few years, small, third-tier exploration and production companies across the U.S. were struggling even at WTI Crude prices of above $60 a barrel.
In the past two weeks, WTI Crude prices plunged from the low $60s to the low $50s, meaning more distress for U.S. shale breakeven prices and for upstream companies, which in turn will result in more distress for the oilfield services sector.
According to the Dallas Fed Energy Survey for Q1, the index for utilization of equipment of oilfield services firms jumped sharply in the first quarter as oil prices rose, but the index for operating margins stood at -6.6, indicating narrowing margins for oilfield services firms in Q1 compared to Q4 2018.
The world’s biggest oilfield services provider Schlumberger cited in April “higher cost of capital, lower borrowing capacity, and investors looking for increased returns” as the primary reasons for an expected 10-percent drop in E&P investments in North America’s onshore this year. Related: Oil Resilient Despite Trade Talk Failure
Last week, S&P downgraded Schlumberger’s rating and revised down Halliburton’s outlook to “negative” from “stable”, in a sign that the sector won’t be able to make the fat profit margins that they did in 2014 when oil prices were at $100 and upstream companies were overspending on drilling and big projects.
During and after the downturn, the OFS sector saw is profit margins shrink severely and for the first time in its history, the industry as a whole reported negative net income for four consecutive years, with a cumulative loss of about US$96 billion, according to Deloitte estimates. During and after the downturn, investors lost a total of US$300 billion in invested capital in the OFS sector, Deloitte says, adding that “In other words, the O&G supply boom has turned into doom for OFS companies and their investors.”
One way forward for the fragmented OFS sector is consolidation, because the fragmented market and the persisting oil price volatility continue to challenge oilfield services companies, Deloitte’s analysts say.
According to Eberhart, mergers and acquisitions (M&A) deals should increase as OFS providers realize that consolidation could help them cut costs and regain pricing power from producing firms.
By Tsvetana Paraskova for Oilprice.com
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