Oil-field services companies are in for a rough year.
The firms that provide the critical services for oil drilling are often not the ones that make headlines. But they are on the front lines making sure everything runs smoothly. That includes everything from drill equipment, to rigs, lodging, well completions, frac sand, transportation, and more.
Much has been made about the pain that oil production companies are going through. The oil majors like Exxon Mobil (XOM) and Royal Dutch Shell (RDS.A) have made massive cuts to their capital spending as a result of low oil prices. But once oil prices rebound, their revenues will rise in concert with the price of West Texas Intermediate and Brent.
However, for the services firms, relief may not arrive this year -- even if oil prices rise. That is because their balance sheets rise and fall with drilling activity, rather than the price of oil (although they are strongly correlated). With huge holes to plug in corporate balance sheets, drilling activity will not pick up right away even if oil prices rise. Oil executives will likely remain cautious, and take a more conservative approach to spending and drilling.
That means there will be a lot of pain for oil-field services companies for the foreseeable future. BP (BP) has cancelled several rig contracts with services firms Ensco (ESV) and SeaDrill Partners (SDLP) for its Gulf of Mexico projects. Breaking the contract cost BP a $160 million termination fee in each case -- no doubt a decent severance for Ensco and SeaDrill, but a signal that BP will not return to drilling anytime soon.
Transocean (RIG) has been forced to cold-stack some of its rigs, and it announced that it was scrapping two more offshore rigs in a recent filing. It may yet idle 18 to 22 more rigs. Global Hunter Securities projects that the downturn for oil-field services companies like Transocean could last another two years. That is evidenced by BP's contract cancellation for rigs that were leased through the summer of 2016.
Worse for the industry is the fact that prices for their services have cratered. With producers slamming on the breaks, they are squeezing the services firms. Contract prices for rigs are way down and producers are negotiating lower and lower prices. With little option, the services companies like Transocean have no other alternative but to accept lower prices for their rigs.
As a result, Moody's says that the services industry is facing a "deep, protracted cyclical downturn." More asset write-downs are expected, and more firms will scrap an increasing number of rigs. While upstream producers may fare better with an oil price rebound, oil field services companies are unlikely to see the upside in the next two years or so.
By Charles Kennedy for Oilprice.com