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PEER STRATEGY

Services Firms: Upstream Boom Has Room to Run

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The world’s biggest oil-field services firms agree that the uptick in E&P activity worldwide since the Russian invasion of Ukraine will be sustained and could be just the start of a multiyear market upcycle. It may have started out among private US firms cautiously taking advantage of higher prices but has now developed into a scramble to secure supplies and services both for this year and next.

  • Bullish Halliburton believes higher services rates will be the norm for now.

The most bullish of the Big Three service companies to report second-quarter earnings last week was Halliburton, whose CEO Jeff Miller said the Houston-based company was effectively “sold out” in North America for the rest of 2022. So tight was the service market there, said Miller, that even “incremental” additions to diesel fleets were almost impossible. This was effectively the case across the industry in North America, he said, and could be seen in continuing shortages of equipment, consumables and skilled labor.

The reality of scarcity can be seen in the skyrocketing cost for such everyday oil-field items as frack sand, which has gone up in price by about 150% for Permian Basin operators, and premiums being paid for both labor and equipment by all companies, whether they are E&Ps, giants like Halliburton, or smaller, more specialized players. The scramble is not just boosting oil-field prices, but also increasing interest in vertical integration so companies can ensure access to critical components and personnel.

Consequently, Halliburton says its North American and international customers are starting the process of securing services and supplies for the next year or contract cycle even earlier than normal. What’s more, they accept that higher rates will be the norm until either oil prices cool or supply-chain and labor snarls get resolved, Miller said.

  • Schlumberger says customers everywhere are bowing to pricing pressure.

If Halliburton’s commentary on the oil market confirmed the red-hot situation in North America, then Schlumberger’s pointed to the slow burn elsewhere. CEO Olivier Le Peuch told investors during his company’s quarterly call that Schlumberger was seeing the beginning of a "broad-based ... multiyear upcycle" around the world, with spending visibly higher across all customer types." The situation, he said, was “positive in all dimensions.”

What’s more, Le Peuch continued, the market outside of North America is about to heat up considerably, with growth rates likely outpacing North America from the second half of the year. This would be led by regions such as Latin America and Europe, but especially in the Middle East where producers are expanding capacity both in oil and gas. The region, said Le Peuch, is early in its growth cycle and will “certainly” see a large ramp-up in the near future.

As in North America, rising demand for oil-field services is straining the ability of companies like Schlumberger to supply them and pushing rates higher as a result. This supply pinch, said Le Peuch, is creating a dynamic where customers that wanted to secure their ability to increase output or expand capacity were bowing to pricing pressure. This was happening everywhere, not just in North America. “It's broad. It's happening today, and it's expanding,” said Le Peuch to drive home the point. “For every contract, for every customer. A year ago, it was mostly in North America. Now, it is international and across all customers."

  • Baker Hughes is more cautious after taking a large write-down in Russia.

Unlike Halliburton and Schlumberger, Baker Hughes approached earning seasons with a bit more trepidation, largely due to a $365 million write-down it was forced to make on its operations in Russia. The company posted a net loss of $839 million for the second quarter of 2022, whereas Halliburton and Schlumberger each posted large gains, with neither seemingly overly encumbered by the suspension of their Russian operations.

Despite the setback, Baker Hughes CEO Lorenzo Simonelli said that services activity continued to grow in North America and internationally, with the North American drilling rig count "continuing to track above our expectations." Simonelli said he expected "modest growth" in the number of active drilling rigs to continue through next year, but warned that "the outlook for 2023 will be dependent on broader macro factors and oil prices."

  • What recession? The oil market is currently decoupled from macro concerns.

Simonelli noted that oil markets faced unusual circumstances. On the one hand, demand for oil looks like declining due to inflation and rising interest rates. On the other, structural factors such as years of underinvestment and new concerns over the insecurity of supply should, according to Baker Hughes, “realistically” keep commodity prices and oil-field activity at high levels, even if moderate demand destruction occurs.

The question of whether oil had for the time being become decoupled from the broader economy was also addressed by Halliburton and Schlumberger. Halliburton’s Miller said plainly that there was no talk of recession at all with his customers, and that all signs pointed to continued expansion.

Schlumberger's CEO Le Peuch likewise noted that energy security was once again a major factor motivating investment decisions. It was, he said, leading decision-makers in the industry to “double down” on securing the equipment and services needed to ensure supply, putting “resilience into the investment cycle.”

How long this situation will last was an open question, but he was certain that near-term volatility would not suddenly lead to a dramatic rollback. Decoupling is here and it will make the current upcycle stronger, longer and pricier as a result. “I think there is a lot of space in it,” he said.

Topics:
Oil-Field Services, Earnings, Independent E&Ps, Exploration, Capital Spending
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