Analysts: Oilfield Service Growth “Muted” Into 2020

Relief for recovering oilfield service providers won’t be coming anytime soon, according to a recent Moody’s report. Thanks to E&P budgets remaining tight as a result of investor demands, Moody’s forecasted “muted” growth for the service industry this year and into 2020.

Moody’s outlook for the oilfield service sector, though, remains stable based on fundamental business conditions in the oil and gas industry over the next 12 to 18 months, the credit rating agency said in a report issued in mid-June.

After hitting a rig count peak last November, the number of land rigs in North America have actually dropped off somewhat. Additionally, dayrates for North American rigs have also seen no relief, and more pricing pressure is expected.

Sreedhar Kona, vice president and senior analyst for Moody’s Investor Service, expects the North American rig count to remain flat at about 1,000 depending on whether oil prices rise.

“Overall rig activity still remains only about 50% of the most recent peak following a steep fall,” Kona wrote in the report.

By contrast, there is some expectation that the rig count for international land rigs will tick upward through this year. 

Kona said the international and national oil companies are “not as constrained as the North American public E&P companies in their ability to spend on drilling activity.” However, the same hobbled capital spending trends on the part of E&Ps internationally, as well as rangebound oil prices, will limit upside.

In North America, excess equipment will continue to overhang the oilfield services market and pricing. For this to change, commodity prices will need to improve or drilling increases. Kona said declines from shale forcing producers to take on second-tier acreage might help demand. Though these potential positives are probably several years out.

In the near term, the large number of drilled but uncompleted wells (DUCs) could improve business.

“The number of U.S. [DUCs] soared to more than 8,500 in the first quarter of 2019, according to the U.S. Energy Information Administration—an all-time high—promising a steady need for well completions through 2020,” Kona wrote.

The hottest drilling targets in the U.S.—particularly the Permian Basin and to a lesser extent the Eagle Ford and the Marcellus shales—promise a healthier environment for oilfield service providers.

Moody’s noted that the Permian “produced over 4.1 million barrels per day (bbl/d) while using 451 rigs in May 2019—a massive increase from 1.6 million bbl/d and roughly 550 rigs in mid-2014.” But the downside is that this demand is drawing competitors.

As producers continue to drill more efficiently and streamline their operations, and as service providers’ high-tech rigs speed up drilling, Kona said the rig count may have hit a ceiling of about 1,000 total rigs.

Drillers with high-spec rigs, including Helmerich & Payne Inc., Patterson-UTI Energy Inc., Nabors Industries Ltd. and Precision Drilling Corp., have seen their margins increase significantly since the beginning of 2017, almost doubling in some cases, according to Moody’s financial metrics and company reports. Utilization has not kept pace, however.

For the largest service companies, revenue has slowed into 2019 after a rise last year, and EBITDA margins are slim. The Moody’s report found that Schlumberger Ltd. had about a 20% EBITDA margin in March of this year. Comparatively, Baker Hughes Inc., a GE company, had about a 22% margin, while Halliburton Co. had about a 16% margin and National Oilwell Varco Inc. about 8%.

In the offshore drilling arena, offshore drillers still face excess capacity despite modest improvement thanks to new long-term contracts and a slight rise in utilization, according to the Moody’s report.

Kona wrote the “oversupplied offshore segment is probably years away from rationalizing” although the new deepwater contracts announced by Diamond Offshore Drilling Inc. and Transocean Ltd. are a plus.

Dayrates for offshore service providers have risen but are still well off the peak. The Moody’s analyst looks for a pickup in deepwater activity in the North Sea, the Persian Gulf, Southeast Asia and other international offshore areas to push utilization to high levels in the short-term.

Lastly, Moody’s noted that consolidation will be a trend, particularly for smaller oilfield service companies.

“Without significant organic growth opportunities, and amid low equity valuations and weak commodity prices, many smaller companies will likely consolidate through stock-financed M&A transactions, since the companies will be strapped for cash and unable to access debt markets,” Kona wrote.

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A more upbeat scenario for offshore service industry could turn on OPEC production cuts, continuing stress in Venezuela, or strong oil demand in India and China.

“Multiple years of underinvestment in resource development and declines in mature production bases would accelerate E&Ps investment in 2020 and beyond if crude demand holds up,” concluded Kona.