Light at the end of the tunnel for oil-field services companies
Firms are clawing back some of their losses, creating tension with producers still relying on cut-rate drilling costs
For America's oilfield-services companies that have been clobbered by the industry's spending cuts, the recent upticks in prices and onshore US drilling activity have come as sweet relief.
The sector has almost certainly hit bottom. Prices, although still weak, are well off their lows from the start of the year. Optimism is creeping back into the oil patch and some producers are even starting to loosen the reins on their spending.
The clearest sign of this for service companies has been the nearly 30% run-up in the rig count from May to August. Many companies, especially around the Permian basin, plan to keep adding rigs in the second half of the year. Even more want to start bringing on line their inventory of drilled but uncompleted wells-the DUCs. All of that translates into more work for service companies.
"Today our customers are thinking about growing their business again rather than being focused on survival," Halliburton's chief executive, David Lesar, told analysts during an August conference call.
It is the first glimpse of a recovery for an industry that has been badly battered by the downturn. More than 100,000 people have been fired as hundreds of rigs were idled. Eighty-three service companies have been forced into bankruptcy, according to law firm Haynes and Boone. The sector's huge debt pile means more are likely to follow into insolvency, even with a nascent recovery. Moody's, the credit rating agency, tallied up around $110bn in debt payments due over the next five years across the sector, an unsustainable level as companies bleed cash.
Services companies came under huge pressure from producers to slash their rates as oil prices collapsed. They didn't have much choice but to go along, facing either lower payments for the little work they could get or shutting operations altogether, which would mean going out of business.
Producers have touted these lower costs-getting more for less-as crucial to surviving the new oil price. But service companies are starting to make clear that the price discounts they extended were temporary. Schlumberger's chief executive Paal Kibsgaard was at pains to point out in his latest call with analysts that the discounts were unsustainable, and often included an oil-price trigger.
For all the talk of coming together and working as partners, the inherent tension between service provider and producer is coming to the fore
Some have gone even further in trying to put a floor under the collapsing rates. "We are calling for an end to price discounting. This is a company-wide formal decision and process. No tender or bid submission will be priced lower than Q2 levels," Weatherford's chief executive, Bernard Duroc-Danner, said in August.
The US Bureau of Labor Statistics tracks producer prices for different sectors of the oil industry, and it shows how steeply those rates have fallen. The producer-price index for well-drilling services stood at 304.5 in July, down 35% from the recent peak of 455 in March 2014 and the lowest level since the depths of the global financial crisis.
It is a period when, for all the talk of coming together and working as partners, the inherent tension between service provider and producer is coming to the fore. In many cases it is pitting producers that still rely on cut-rate drilling costs against service companies that now expect to see some of the fruits of any price rise.
"Price negotiations have been a bar-room brawl," said Halliburton's president, Jeffrey Miller. "In certain situations, as we've seen signs of recovery, we've elected to walk away from money-losing jobs in recent months."
In many ways, the dynamic mirrors what was happening in late 2013 and 2014, when major oil producers watching their margins erode blamed service companies for spiraling inflation in the oil patch.
Although a recovery may be in sight for the US services sector, it will be slow and uneven. The efficiency gains shale producers have made-longer lateral wells and the drilling of multiple wells from a single pad-means they will continue to get more oil from fewer rigs, which is a net negative for the services sector. "Nine hundred is the new 2,000 for US rig activity," reckons Halliburton's Miller. "It'll only take 900 rigs to consume all of the horsepower in the market."
However, advances in well designs and fracking operations are also creating new opportunities. For instance, producers continue to create more powerful frack jobs-and higher initial production rates-by pumping more sand and proppants into their wells.
Many shale producers are using nearly twice as much sand and proppant per well than they were just a couple years ago. That is clearly good news for sand suppliers, like Hi-Crush Partners and US Silica-both of which saw their share prices more than double from March to September.