Oilfield services companies, like many others in the energy industry, are feeling the pain of low oil prices and reduced capital spending by upstream companies brought on by the global COVID-19 pandemic, which is reducing refined products demand. Until OPEC, Russia and a group of 20 nations recently agreed to cut global crude production, the effects of the Saudi-Russia oil price war previously flooded the global market with cheap oil, further depressing prices. These converging events are reflected in the Philadelphia SE Oil Service Index (OSX)—an index that tracks the performance of 16 publicly traded oilfield services companies across industry segments—which has declined 72% from 102.39 on April 23, 2019 to 28.33 on April 9, 2020. The public markets have little to no appetite for services companies limiting their ability to raise capital in either the equity or debt markets.
Philadelphia SE Oil Service Index (OSX)
(Source: Yahoo! Finance)
Oilfield Services Sector Consolidation IS NEEDED
What needs to happen for the oilfield services sector to weather this storm and provide shareholders with confidence and reasonable rates of return? First and foremost, the sector needs significant consolidation to strengthen balance sheets, reduce oversupply of equipment and reduce cost of doing business. Any or all consolidations should consider vertical integrations such as adding new capabilities to existing service line capabilities. The combination of vertically-compatible businesses will eliminate overall corporate costs and allow companies to offer a broader range and, hopefully, technology-advanced services to their customers in a cost-effective manner.
Additionally, there’s an overabundance of equipment competing for fewer customers, resulting in price degradation. For example, in January 2020, Schlumberger announced it was cold stacking half of their fracturing fleet and Halliburton announced it was reducing their fracturing fleet by 22% after reporting a $2.2 billion loss in their pressure pumping business. The two largest oilfield services companies are sending a message that reducing the supply side with respect to equipment is necessary to rebalance—at least in this case their respective pressure pumping businesses.
As U.S. rig counts decline, oilfield service companies are left with difficult decisions of whether to concede upstream producer discounts or stand firm on prices and risk losing work. So far this year, eight oilfield service companies with $10.9 billion in debt have filed for bankruptcy in the first quarter so far this year, including three since oil prices fell to $20/bbl in early March, according to latest figures tracked by law firm Haynes and Boone.
Rig Count By Commodity
(Source: Baker Hughes)
Oilfield Service Layoffs Inevitable, But Necessary To Survive
An unfortunate, but sometimes necessary, aspect of reducing costs is typically a reduction in headcount. If and when the oilfield services industry moves forward with consolidation, then there’ll be the need to eliminate duplicative capabilities. Further, the industry can use technology to improve processes and procedures reducing costs in their supply chain and the ability to provide services remotely limiting the need for onsite employees.
The energy industry needs to move forward quickly despite the pain to allow for oilfield services companies to thrive in the future and provide shareholders with rewards for their investment. Otherwise, the pain will be prolonged.