?The global oilfield-services industry’s size is estimated to have been close to $285 billion by year-end 2008. The market has grown at a rapid pace during the past decade, to 3.9 times its size in 1999, representing a compounded annual growth rate of 16.2%, according to a Calyon Securities (USA) Inc. analysis, “Oilfield Services: 2009 Sector Outlook.”


However, the industry will witness a decline in 2009, especially in North America, as a result of the financial crisis and a global economic slowdown, Calyon analysts predict. The global services industry’s revenue this year is estimated to decline 13% to $249 billion.


The global land drilling market is dominated by the major North American land drillers. About 72% of the world’s land rigs currently operate in North America, and the North American decline could be severe.


The trigger for the decline is the recent fall in commodity prices and the credit crisis, which will result in a sharp decline in E&P capital spending within North America. While Calyon anticipates drilling activity in the unconventional plays will be more resilient, the cutbacks in the conventional, onshore plays will be prominent.


In the North American land drilling market, dayrates began to decline in fourth-quarter 2008 as E&P companies shrank their drilling programs in the midst of softer commodity prices and constrained capital access. Conventional plays are expected to suffer the largest impact of capex reductions.


While Calyon reports that some of the new, built-for-purpose rigs entering the market will continue to work through this weakness, the older, legacy rigs will be stacked. Dayrates are expected to decline sharply by fourth-quarter 2009.


The analysts also estimate that daily operating margins will decline by an average of about $2,000 by fourth-quarter 2009 as onshore drillers try hard to maintain utilization close to the average 70% to 75%, versus 86% in third-quarter 2008.


The analysts also expect the land-drilling business to experience a large contraction, due to the decline in E&P capex, but report that the larger, more technology-oriented companies will perform better than smaller companies.


Meanwhile, in response to the capital-access crisis and lower oil and gas prices, the analysts have reduced their upstream-spending outlook and rig-count forecasts for 2009.


They anticipate a 23% lower global rig count in 2009 and expect North America will witness a 29% reduction as gas-focused E&Ps reduce spending.


The U.S. land rig count is expected to decline 30% in 2009 versus 2008.


Canada will witness a similar 29% decrease in rig count in 2009. Oil-sands-mining activity there has a higher breakeven point, some $80 to $95 per barrel, and is likely to experience project deferrals.
Internationally, drilling in the Middle East and Europe will decline some 13%. Also, Africa will see the impact of uncertainty in operating in Nigeria and the Asia-Pacific region and is expected to witness softness in the land rig market.


Latin America will experience only a modest decline in 2009 as both Petrobras and Pemex continue intense offshore-drilling programs.


Overall, the international rig count will post a decline of 10% in 2009 versus that of 2008, the analysts expect.


The 25 companies in Calyon’s oilfield-services universe are expected to post reduced earnings by an average 8% to 15% in 2009, versus between 10% and 15% average growth in 2008 and close to 30% in 2007.
However, barring a prolonged, global economic slowdown, demand for oilfield services should increase in 2010. Oilfield-service-stock valuations are already based on expectations of a severe global economic slowdown, if not recession.


While the U.S. and parts of Europe may experience a recession, emerging markets should continue to grow, albeit at a slower pace, and drive demand for crude oil. The Calyon analysts expect modest growth in 2010, driven by deepwater offshore and international markets.


The Oil Service Sector Index (OSX) tends to lead the trend in oil prices, evidenced by the fact that, during the past two cyclical troughs starting in 1998 and 2001, the OSX bottomed before oil prices. Typically, the market anticipates a decline in oil prices, resulting in support for demand and an eventual rebound in demand and prices. Comparing the OSX and commodities prices now indicates that oil prices may have already bottomed at $35.


During fourth-quarter 2008, oil-service stock prices declined by an average of 45% to 55%, far beyond the downward earnings-per-share (EPS) revisions of 25% to 30%. Recent EPS revisions by analysts have not affected stock prices, signaling that the industry’s stock valuations may have already reached the trough.


Although additional downward EPS revisions may be required, the Calyon analysts report that the market already discounts this scenario, with the stocks trading below prior trough valuations. Therefore, further downward revisions are unlikely to result in additional share-price weakness.

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