Jan. 24–Weatherford International’s stock is trading below $1 a share. Schlumberger expects growth in its shale business to flatten or decline. General Electric reduced its ownership stake of Baker Hughes. Halliburton’s stock market value has fallen below what it was at one of the worst points of the last oil bust.
Energy services companies are facing another tough slog as they recover from a deep industry downturn that piled up billions of dollars in red ink and cost tens of thousands of jobs. The industry, which provides drilling, fracking and a variety of other services for oil and gas companies, now finds itself challenged by a recent plunge in oil prices, pipeline shortages that have slowed drilling, and the still-lingering effects of a 2014 oil bust, which have led customers to keep a tight rein on spending, analysts said.
Despite record oil and natural gas production in the United States, the stock prices of Schlumberger, the world’s biggest energy services company, and Halliburton, number two, have fallen to about half of what they were a year ago. The share price of number three Baker Hughes is down by more than one-third and Weatherford is on the verge of getting delisted from the New York stock exchange.
“Given increasing production in service-intensive U.S. shale plays, it should be the golden era for service companies,” said Ben Carey, a managing director with the Houston office of energy strategy and consulting firm Accenture. “But it’s not.”
How services companies respond to this difficult market environment is critical for Greater Houston, where the sector employs about 45,000 and energy services companies count among the region’s biggest employers. The rebound of the services sector over the past two years has stabilized the region’s energy industry, adding 10,000 jobs since hitting bottom in late 2016 and more than offsetting continuing job losses in exploration and production, according to the Labor Department.
After a 40 percent plunge in oil prices during the fourth quarter, a more detailed picture of how the sector is faring has begun to emerge as the biggest companies report their end-of-year earnings and provide outlooks for the year ahead. Both Schlumberger and Halliburton recently reported solid profits for 2018 — $2.1 billion and $1.7 billion respectively — but those figures masked a significant slowdown during the last three months of the year in North America.
Schlumberger said its North American revenues fell 12 percent from the previous quarter, while Halliburton said its revenues from North American operations fell 11 percent during the same period as activity slowed in U.S. shale oil and gas fields. The U.S. rig count, which tracks the number of drilling rigs in operation, has fallen for three consecutive weeks, including last week’s plunge of 25 rigs, the biggest drop since the bottom of the oil bust in early 2016.
Halliburton, which dominates the North American fracking market, said it expects the slowdown in its business to extend through the first quarter as its medium-sized customers hold spending flat in the face of lower crude prices and its smaller customers cut budgets. In a conference call with analysts, Halliburton CEO Jeff Miller said the company would cut its capital spending this year and adjust operations as needed, including pulling equipment from the field, if market conditions require it.
Investors and analysts see a disconnect between the general recovery experienced by oil and natural gas companies in recent years and the continued struggles of services firms. In many cases, the stock market values of energy production companies have increased significantly from the bottom of the oil bust in 2016 while the market values of services companies have fallen below those at the worst point of the downturn.
Halliburton’s stock market value, for example, slid from $60.4 billion during the second quarter of 2014 to $29.1 billion during the fourth quarter of 2015 and now stands around $27 billion. Schlumberger was valued at $152.9 billion during the second quarter of 2014, falling to $87 billion during third quarter of 2015 and now stands at about $60 billion.
In contrast, the stock market value of the Houston exploration and production company EOG resources has climbed by two-thirds since the bottom of the oil bust, to $56.3 billion from $33.8 billion. ConocoPhillips, the Houston independent oil company, has seen its stock market value double, to $77.1 billion from its 2016 low point of $38.5 billion
The reason for the disconnect is fundamental: returns. Exploration and production companies are generating returns on investment that are many times higher than services. Schlumberger, which has the highest return on investment among the big services firms, returned just under 3 percent in the third quarter of 2018. ConocoPhillips returned nearly 10 percent; EOG nearly 18 percent.
Services companies are particularly sensitive to swings in oil prices. When crude prices fall, one of the first places oil and gas producers turn to cut costs are energy services.
During the oil bust, services companies were forced to agree to steep discounts to hold onto customers, which led to multi-billion dollar losses and tens of thousands of layoffs. As prices rose through 2017 and most of 2018, services companies were able to raise some of their rates, but nowhere near levels of the boom year of 2014.
In a recent investors presentation, the Canadian drilling rig operator Trinidad Drilling reported that the company was charging an average of $28,000 per day to rent one of its rigs during the first quarter of 2015. It now charges an average of just over $20,000.
Crude oil prices are improving, but the fourth quarter price drop has led oil and gas producers to drill new wells to meet lease obligations, but not put them into production. The Energy Department estimates that nearly 8,600 U.S. well are drilled, but uncompleted, with nearly half of them in the Permian Basin — creating a problem for service companies that provide or support hydraulic fracturing and other well completion services.
During Halliburton’s Tuesday morning analyst call, Miller said the fourth quarter crude oil price drop quickly erased any price gains they had made as their customers cut back on completion projects, leaving too many fracking operations seeking too few projects. “This created excess equipment capacity in the market and had a detrimental effect on services pricing,” Miller said.
It may take more than six months before the market swings back in favor of service companies. If oil prices rise, and new pipelines come into service in the second half of the year as expected, oil and gas companies could start putting those drilled but uncompleted wells into production, meaning a backlog of work for services firms..
In the longer term, analysts said, services companies need to find ways to moderate the cyclical swings that have hammered their industry. Carey, the Accenture analyst, said companies can start with collaboration. As many as 40 companies can work on a single drilling pad doing everything from supplying frac sand to providing chemicals and detonating explosives for hydraulic fracturing. Acts as simple as improving schedule coordination can make operations more efficient and boost production.
More automation, more extensive use of sensors to collect drilling and other data, and more digital technology to analyze that data would could lower costs, improve efficiency and boost profits, Carey said..
“A business model change like that will change a zero sum game to a win-win,” Carey said.
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