SLB and Halliburton reported second-quarter results last week, and both noted strong international business and weaker performance at home. Baker Hughes, which posted its report on Thursday, also noted the strength of its international business—and didn’t boast the performance of its business at home. It’s a trend that’s strengthening.
The series of megadeals in the oil and gas space in the United States that started last year and continued into this year has had an impact across the industry. Yet this impact was perhaps felt most acutely in oilfield services—and it was not a positive one.
“When customers combine, you might have a guy who was running seven rigs, and a guy who was running five rigs, that adds together to 12. But when they come back, they run 10,” Chris Wright, chief executive of Liberty Energy, told Reuters. Liberty, by the way, had better fortunes last quarter and exceeded expectations with its bottom line. Yet the outlook both for the company and the oilfield services sector remains rather gloomy, per Zacks.
The latest Dallas Fed Energy Survey, which was published in June, revealed a deteriorating picture in the industry, with its equipment utilization index slipping below zero and the same thing happening to OSPs’ operating margin index. The price index for oilfield service firms remains positive but dropped precipitously, from 25 to 3.9.
Things are not looking good for oilfield service providers. This is because the pool of clients they now have is much smaller than it was two years ago—and they are really going after those synergies that merging companies like so much. Reuters noted that Diamondback Energy, for one, expected synergy savings of some $550 million annually after its takeover of Endeavor Energy. Most of that would come from operations, meaning oilfield services.
The consolidation wave, then, means less work on offer for oilfield service providers. But this is only part of the challenge. “Industry consolidation is the main driver of change in the industry currently,” one Dallas Fed Energy Survey respondent said for the June edition of the survey.
“Many competitors are extremely consolidated in their work profile and customer base,” he added. “As consolidation occurs, often the acquiring company will not pick up the existing service companies. Once cut loose, these companies are searching for a lifeline and in many instances willing to work for negative margin rates, doing whatever they can to put money toward fixed period costs.”
This trend has hurt mostly small players in the field, and some have been driven to bankruptcy while the rest seek to secure long-term commitments from their shrinking client base. Fracking services provider Nitro Fluids, for instance, filed for Chapter 11 bankruptcy protection earlier this year, citing a massive drop in revenues because of the E&P industry’s consolidation. Reuters noted in a report the company’s revenues had gone from some $1.2 million per month last year to less than $100,000 this year.
“Everyone is scrambling and fighting for less scraps,” the chief executive of one sector player, Oifield Service Professionals, told the publication. “The operators know that they can get better rates. They can just go out into the market and say, ‘Well, who wants my business?'”
It’s a buyers’ market in oilfield services, and it is likely to remain a buyers’ market for the observable future as the consolidation among producers continues. This will, in turn, prompt consolidation in the oilfield services sector as companies try to survive.
“Too many equipment providers are chasing too few E&P customers. Without consolidation within service or equipment providers, it will be a race to the bottom for pricing,” one respondent to the Dallas Fed Energy Survey said earlier this year.
The race is already on, and some are falling behind. The rest are starting to consolidate. Since the start of the year, the value of mergers and acquisitions in the oilfield services space has hit $12 billion, according to Enverus data cited by Reuters. This compares with $5.3 for all of last year, pointing to a clear trend in a consolidation direction.
“As the industry consolidates across the board you will see these bigger (producers) working with bigger service companies, so the service companies that have scale will have the advantage over time,” Rystad Energy vice president Thomas Jacobs told Reuters. They will also be working with them under longer-term contracts, which OSPs are increasingly seeking to insulate themselves against sudden loss of business.
In other words, the same thing that last year started happening in the exploration and production sector is now happening in the oilfield services sector because there is really no other option for oilfield service firms. The process looks set to continue in a survival-of-the-fittest fashion until the amount of competition in oilfield service providers matches the competition among exploration and production players. But it won’t be painless: “The outlook is a bloodbath,” said Rystad’s Jacobs.
By Irina Slav for Oilprice.com
