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Oilfield services sector stops the rot

The economic downturn may have stabilised in the US, but full recovery looks a distant prospect

Oil prices are tentatively rallying and a chunk of curtailed US production has returned to the market, marking something of a recovery after a traumatic first half of the year for the US shale patch. For the domestic oilfield services and equipment (OFSE) sector, an improved economic backdrop is a considerable relief after six months of slashed capex and little ­drilling activity.

Financial damage in the OFSE sector significantly slowed across the third quarter. The leading trio of Schlumberger, Halliburton and Baker Hughes posted a combined $269mn net loss across the quarter, against $23.9bn during the first six months.

Those with the highest exposure to US shale have been hit hardest throughout the economic downturn—and thus Schlumberger saw the largest reversal in its fortunes too. The company reported a $3.4bn net loss in Q2 but slashed those losses to just $82mn in Q3. The North American segment of the business was still the worst performer, however, as revenues slipped another 2pc quarter-on-quarter.

“We believe that overall North American drilling and completion activity will struggle to be flat on a year-over-year basis in 2021” Worrell, Baker Hughes

In September, Schlumberger agreed to offload a majority stake in its North American fracking business to rival Liberty Oilfield Services for $448mn, aimed at reducing exposure to the domestic shale sector. Following the transaction, Schlumberger said international revenues would rise to 80pc of the portfolio, versus an average of 65pc over the past decade.

“Increased completions activity on drilled-but-uncompleted wells was offset by reduced drilling in US land,” says Olivier Le Peuch, Schlumberger’s CEO. “North America offshore was affected by reduced rig activity, lower multiclient seismic licence sales, and hurricane ­disruption.”

On top of the financial challenges in the shale patch, the Gulf of Mexico was hit by a record number of hurricanes in Q3, which caused upstream disruptions and shut in significant ­production.

Halliburton posted the lowest net loss of the OFSE heavyweights in Q3. The US firm recorded a $17mn loss against $1.7bn during the previous quarter. Like Schlumberger, the international segment of the business was central, and both firms saw a significant boost from Latin American activity. Halliburton’s North American revenue slipped by 6pc between the quarters, to $984mn.

For Baker Hughes, the company declared a $170mn net loss across Q3 compared with $195mn in Q2, the lowest combined loss of the trio. Internationally, there was an important order to supply equipment to NOC Qatar Petroleum’s North Field East project. The US company will provide refrigerant compressors to four LNG trains, representing 33mn t/yr in capacity aimed at reducing emissions by c.5pc.

With the US shale sector suffering, OFSE companies have been eager to showcase their energy transition credentials. In July, Baker Hughes and Italian pipeline partner Snam announced they had successfully tested the world’s first ‘hybrid’ hydrogen turbine designed for a gas network.

Baker Hughes is increasingly looking to diversify its portfolio and pivot its technology towards lower carbon solutions, aimed at offsetting falling returns in the shale patch. The announcement from US producer ConocoPhillips in October that it would target net-zero emissions by 2050, a first among larger North American E&P firms, reinforced the growing trend for burnishing green credentials even in the US oil industry.

Sinking feeling

Full financial recovery in the US OFSE sector looks unlikely over the near-term. With global Covid-19 infections growing and the risk of further economic lockdowns increasing, demand-side uncertainty is likely to prevent a major oil price resurgence. The rig count has marginally improved since it bottomed out in August but is still down by 64pc since January. And shale producers are unlikely to commit more cash and add to production guidance until there is greater ­market buoyancy.

“As more E&Ps commit to maintenance mode capex levels, minimal production growth and returning more cash to their shareholders, we believe that overall North American drilling and completion activity will struggle to be flat on a year-over-year basis in 2021 and that US oil production should decline on a year-over-year basis,” says Brian Worrell, CFO at Baker Hughes.

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