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Oilfield services share in the economic gloom

Industry downturn forecast as wave of E&P companies forced to dramatically cut capex

Oilfield services and equipment (OFSE) companies find themselves caught in a perfect storm of financial uncertainty as global measures to prevent the spread of Covid-19 aggravate an already ruinous oil price setting reminiscent of the 2014 crash.

Efforts by Saudi Arabia to cripple the US shale patch, following Russia’s refusal to maintain production cuts, could wreak particular havoc on the growth plans of US-focused firms. Many firms’ capex budgets have been slashed and a swathe of bankruptcies could follow.

“We now expect exploration and production spending to fall by 30pc in North America versus original projections for a 10pc decline,” says James West, senior managing director at bank Evercore ISI. “We believe a large number of restructurings will unfold for US-leveraged oil service firms.”  

Consultancy Rystad agrees US shale will particularly suffer from the cutbacks. Of the $100bn global reduction in E&P spending Rystad expects this year, US shale represents a 65pc share. The loss will result in as many as 5,800 horizontal wells being iced—half of original company guidance.

“For Europe, this crisis is worse than the one that companies experienced in 2015 and 2016” Martinsen, Rystad

And the rig count is likely to plummet too. “Our initial expectation is that the US rig count will drop by c.40pc in 2020 starting in the second quarter and accelerate from there,” says Kurt Hallead, a managing director at bank RBC Capital Markets. “It is safe to assume that, if oil prices remain in the $25-30/bl range, the rig count will likely decline further.”

Financial restrictions and extensive global quarantines will also impact job security in the OFSE sector. US thinktank the Brookings Institution identified the city of Midland in Texas, the epicentre of US shale, as the city most at risk of widescale unemployment across the country. Almost 43pc of the working population could be made unemployed this year because of the Covid-19 outbreak and the plunging oil price. OFSE heavyweight Halliburton, which has operations in the city, says it may be forced to reduce working hours for thousands of its employees.     

Global nightmare

Internationally, the economic situation for OFSE companies is similarly bleak. “The consensus view is that the international rig count will be flat to down 10pc,” says Hallead. “In prior oil price bear markets and recessionary environments, the international rig count declined anywhere between 15-30pc.”

Rystad estimates that purchases of global oilfield services this year could fall by as much as 8pc at an average oil price of $40/bl. And that figure could almost double to 15pc if crude trades more towards $30/bl in 2020. Unless the Opec+ alliance agrees further cuts later in the year, then spending next year could slide by 7pc at $40/bl or by 11pc at $30/bl, it forecasts.  

Acute setback

European OFSE companies, particularly in the UK and Norway, are also likely to experience financial strain this year. “For Europe, this crisis is worse than the one that companies experienced in 2015 and 2016 after the oil price fall,” says Audun Martinsen, head of oilfield services research at Rystad.

$100bn – estimated loss in E&P spending

An employee of Norway’s Equinor tested positive for Covid-19 while working on the Martin Linge platform in the North Sea. As a result, 90pc of the platform’s personnel were forced to return to shore. Outbreaks at facilities and advice to practise social distancing are likely to substantially limit the operational capabilities of companies in the next few weeks to months.

Companies in Europe have voiced already concerns that they will be unable to retain all staff. Norwegian engineering firm Aker Solutions says it will likely have to temporarily lay off as many as 6,000 employees.

Small and midsized European OFSE companies will be markedly affected. Rystad estimates that as many as 20pc could go bankrupt this year. “This will have a pronounced effect on the European energy services market, which is heavily dependent on its international workforce and an efficient flow of goods and services between nations,” says Martinsen.

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