OFS: Lower-for-Longer Scenario

[Editor's note: This story is part three of the three-part "The Path Forward" special report. A version of this story appears in the May 2020 edition of Oil and Gas Investor. Subscribe to the magazine here.]  

Large oilfield service companies are planning for the worst in 2020 as the industry faces the dual threat of a commodity price collapse and COVID-19. Executives from Schlumberger Ltd., Halliburton Co. and Baker Hughes Co. are all in agreement that the market situation is fluid and trending south and that activity levels across the U.S. and the world are being impacted.

As a result, many service providers are looking at decisive and hefty spending cuts with plans to concentrate remaining capital on operations that generate cash flow as the headwinds stiffen.

“These market conditions are prompting us to accelerate our position in product lines, accelerate our position in ‘scale-to-fit’ and accelerating laying down equipment and unfortunately separating some of our resources and employees,” Schlumberger CEO Olivier Le Peuch told investors at the recent Scotia Howard Weil Conference. “We don’t necessarily need to restructure. The restructure was already pending. It is not an easy ride, I must say, but I think we are doing everything we can.”

Schlumberger can flex its capital spending plans lower, if warranted, down as much as 30% below last year’s spend of around $1.6 billion. Le Peuch added that in case of an extreme scenario the company would be looking for a way to exceed that cut and keep operating.

“The industry is facing an unprecedented dual impact on the demand and supply side, which none of us have ever witnessed over the course of our professional lifetimes,” said Halliburton CFO Lance Loeffler. “While the duration and magnitude of the downturn is still relatively unknown and continues to evolve, know that Halliburton will be swift with our actions. We don’t have presumptions on a sharp recovery at this point and will take actions with that view in mind.”

Halliburton is seeing a rapid reduction in activity across North America and a 60% to 65% overall decline assumption in rig count is being modeled for the last quarter of 2020. In mid-March, the company furloughed about 3,500 employees at its Houston headquarters for a two-month period in a move to help weather the storm. The company’s capex will be significantly lower than the originally announced $1.2 billion. Loeffler cited the 2015 to 2016 capex level of $800 million not being out of the question for this year.

“We’re going to be very thoughtful about pricing,” added Loeffler. “It was already at a fairly challenging level for the industry to really justify any reinvestment. I think this will only put more stress on that. At the end of the day, it really doesn’t make much sense for us to burn up our equipment for sub-scale returns. It will be a very different view of North America, and I believe it will be happening in the short term.”

Baker Hughes also is preparing for a ‘pretty meaningful’ downturn as it looks to accelerate cost cutting initiatives and scaling the business as needed. The company’s North American business is about 40% production related operations—artificial lift and production chemicals—and 60% drilling and completions.

“Well completions are going to be coming down,” said Judson Bailey, vice president of investor relations for Baker Hughes. “E&Ps are going to be cash-constrained. Our lift business will come under some pressure. Our completions side doesn’t have pressure pumping. It’s rotary steerables, completion tools, etc. I would expect those to, at least initially, fall in line with the overall drilling and completion trends.”

Like its competitors, the contractor can scale its planned 2020 capex based on activity. A 20% to 30% reduction in spending is something that is ‘doable,’ according to Bailey.

If it’s any consolation, operators realize they need oilfield service companies to survive. If one player goes down, it becomes a bit harder for the industry to remain competitive.

“We need service companies to stay in business or else we cannot get our goals accomplished,” Earthstone Energy Inc. CEO Robert Anderson said, adding the company tends to work with smaller oilfield service companies with cultures similar to its own. “We also don’t try to squeeze the last dollar out of the service company. If we can’t make money on a project, then we both go home. So, we try to get everyone focused on the economics.”

Raymond James & Associates forecast U.S. upstream spending would fall by 50% year-over-year. 

“There are some restrictions to how quickly activity can fall, but what is clear is that the U.S. oilfield needs to effectively come to a stop. It remains unlikely that noninvestment grade credit markets will open up to oilfield services without a significant rebound in oil prices,” analysts said in a note.  “Therefore, reducing cash burn is the goal. Eventually, necessary service activity will normalize; however, there is no clarity as to when this would occur. While this is a cyclical industry, at today’s activity levels some companies may not get to the better times.”

“While this is a cyclical industry, at today’s activity levels some companies may not get to the better times.”—Raymond James & Associates

---

Specialists under pressure
Analysts with Wood Mackenzie have also signaled an acceleration to the downturn in the U.S. oil service sector, with increasing capital discipline by operators impacting demand for equipment and labor in 2020.

“In the U.S. Lower 48 market, we are already seeing major pricing concessions,” said Mhairidh Evans, principal analyst in Wood Mackenzie’s upstream supply chain research team. “Some pressure pumpers have reduced prices by as much as 20%, while rig rates have dropped by about 15%.”

Pressure pumper BJ Services was already facing a soft market for services ahead of the oil price crash due to many operators transitioning to a ‘living within cash flow’ business model. The contractor has implemented executive and organizational salary adjustments, suspended certain stipends and discretionary benefits such as 401k and is  continuing to reduce and adapt its workforce where required. BJ has enacted temporary furloughs on the portions of its workforce immediately impacted by client changes.

“Clients are certainly suspending projects,” said BJ Services CEO Warren Zemlak. “That’s probably been the more immediate and significant impact. This market continues to throw new challenges at us. Given the erosion of pricing over the past couple of years I think that, quite frankly, there isn’t a whole lot to give.”

Contract driller Nabors Industries has cut its planned 2020 spending plan from a midpoint of about $360 million to just under $300 million due to the rapidly deteriorating industry landscape. The contractor is planning for a prolonged impact of the coronavirus and has already been notified of operator’s plans to lay down rigs in the immediate future.

“We are planning and assuming that it is going to be a fairly rugged downturn,” said Nabors CFO William Restrepo. “For planning purposes we’re assuming it is going to be fairly long with an impact on pricing and volume.”

Nabors has also implemented broad salary reductions across the company (20% for certain management and 10% for certain other employees) as well as a suspension of its dividend. 

Velda Addison contributed to this article.

Read the rest of Oil and Gas Investor's "The Path Forward" special report:

Part 1: The E&P Survival Guide 

Amid a pandemic and a disastrously timed OPEC+ supply war, executives, analysts and consultants advise hedging strategies, keeping a close watch on markets and, potentially, rebuilding business plans from the ground up.

Part 2: Full Reverse 

Market forces are at competing odds, with a silent virus killing global demand for oil and foreign antagonists pushing more volumes into the supply pipeline. How does it end, and who wins—or just remains standing?

Part 3: OFS: Lower-for-Longer Scenario (story above)

As E&Ps jam the brakes on capex spend, the largest U.S. oilfield service providers respond in unison, cutting costs where they can and laying down equipment where they must.