The Fuse

Oilfield Services: North American Market Getting Slammed the Hardest

by Matt Piotrowski | January 26, 2016

Everyone in the oil world appears to be under stress with prices at $30, but this week’s earnings reports offer more evidence that the North American market is under greater pressure than the rest of the world. Results from two major players in the oilfield services sector show that their North American businesses suffered significantly larger losses compared to their international operations.

Everyone in the oil world appears to be under stress with prices at $30, but this week’s earnings reports offer more evidence that the North American market is under greater pressure than the rest of the world.

Halliburton performed better outside of North America last year, particularly in the Middle East and Asia. Throughout the Middle East, the rig count actually rose last year. By contrast, it fell by a massive 64 percent in the U.S., signaling that high-cost producers in the U.S. are, in fact, under the greatest strain. For the fourth quarter, the company’s revenue fell by 5 percent for its international business, but took a 13 percent hit in North America. Schlumberger reported similarly dire statistics—its revenues were down by 39 percent in North America for the year, while they fell by 21 percent in other markets. For the fourth quarter, North American revenue plunged 14 percent, but fell just 6 percent elsewhere. North America, where prices have pushed operating margins and cash flow into the red, should continue to be the biggest drag for this year, too.  “We expect activity in the Middle East/Asia region to again be the most resilient in 2016 as recent mature field project awards throughout the Middle East are anticipated to move forward,” said Halliburton’s CEO Dave Lesar on the company’s fourth-quarter conference call.

Cost reductions = layoffs

The results from the two major oilfield services companies are grim, but these firms are doing relatively well as they performed better than expected for the final quarter of 2015. For both of them, their revenues did not fall as sharply as the rig count, and their earnings per share beat consensus expectations for the fourth quarter. Moreover, they are not in danger of going bankrupt like independent producers in the shale patch. In fact, Halliburton is still looking to close on its purchase of rival Baker Hughes, saying it is ready to sell off more assets to close the merger. The firms are weathering the low oil price storm in stride and appear poised to profit once again after the market rebounds—but it’s coming at a heavy cost. “It really is around aggressive cost control,” said Jeff Miller, president of Halliburton.

The companies have been able to improve margins by taking drastic measures, particularly by reducing their headcounts.

The companies have been able to improve margins by taking drastic measures, particularly by reducing their headcounts. These deep cuts were able to partially compensate for lack of activity. Halliburton announced this week that it shed 4,000 more jobs in the fourth quarter, putting the total at 22,000 since 2014. This represents roughly 25 percent of the company’s global workforce. Halliburton plans to slash its own capex to $1.6 billion in 2016, after cutting back to $2.2 billion last year. It also consolidated offices worldwide and halted operations in two countries. Schlumberger, meanwhile, let go 10,000 employees in the fourth quarter, and 34,000 for the past year, which, like Halliburton, is about a quarter of its total workforce.

Uncertainty reigns

Although the oilfield service giants—which provide assistance to companies in drilling, extracting and transporting oil—will undoubtedly survive, there’s a lot of uncertainty going forward, prompting them to focus on cost per barrel optimization and improving efficiency

They, like the rest in the industry, are paralyzed by oil price volatility.

Oil Price and Oil Price Volatility 2013 - Present (002)

Oil companies cutting back on capital expenditures for 2016 means less activity for oilfield services. This complicates their planning. Halliburton CEO Dave Lesar pointed out that exploration and production (E&P) capex will fall for the second straight year, for the first time since the 1980s, prompting his company to plan on a more impromptu basis rather than sketch out longer-term strategies. More project deferrals and cancellations will put further pressure on this sector.

“The reality is: Due to the macro-uncertainties, many of our customers are managing their businesses in real-time, rig by rig,” Lesar said. “Accordingly, we are going to take this market week-by-week, and in some cases, crew by crew. This is unlikely to change until our customers have confidence in a sustainable and economical oil price.”

He added: “Right now, our customers don’t know what they are going to spend, where they are going to spend it and when they are going to spend it in North America at this point in time.”

“Right now, our customers don’t know what they are going to spend, where they are going to spend it and when they are going to spend it in North America at this point in time.”

Besides North America, Halliburton is seeing certain difficulties in Latin America, where national oil companies are under severe stress amid lower prices, macro-economic uncertainties, and political unrest. “Nearly every country is facing some sort of particular challenge whether it’s macroeconomic or just pure facing down commodity price…. So we’re seeing historical lows in terms of rig activity in a couple of countries and I don’t see that changing,” said Lesar.

Schlumberger also highlighted how the difficult environment is wreaking havoc with planning. CEO Paal Kibsgaar said: “Unscheduled and abrupt activity cancellations creating an operating environment that is increasingly complex to navigate and where the traditional year-end products and multiclient seismic sales were largely muted.”

North American market more in flux than rest of the world

“We expect the recovery will play out very similar to others where North America will rebound first and the strongest, followed by the international markets where the rebound will be more methodical.”

It’s not all bad news in North America. For Halliburton, its margins in that market improved in the fourth quarter, and it feels that once prices and the rig count bottom out, North America has a big upside. Lesar explained the differences in the two markets, with the pace of business much faster in the U.S., noting that with the increased efficiency in fracking in the U.S., the time to drill and complete a well has fallen sharply. By contrast, in the international market, projects are longer term and fields are more mature: “So the discussions that you have with customers around price concessions and scope changes is typically done within the context of an existing long-term contract.”

Lesar added: “We expect the recovery will play out very similar to others where North America will rebound first and the strongest, followed by the international markets where the rebound will be more methodical.”

But it will obviously be a long effort for the market to rebalance, with inventories remaining high, U.S. shale production not falling sharply enough to lift prices, and OPEC pumping at high levels. All this is occurring against the backdrop of economic worries, which could have long-term ramifications for demand.

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