Several factors suggest that any recovery in the North American oil-field services and equipment market will be muted if oil prices generally range between $40 and $60 per barrel over the next two to three years.
First and foremost, the market will take time to work off excess capacity built up during the boom years, when producers privileged output growth at any cost and took advantage of low-cost debt and equity capital to outspend cash flow.
Moreover, after an initial rebound from depressed levels, incremental demand for services and equipment likely won’t grow at the exponential rates witnessed in the early innings of the shale revolution. In fact, any sustainable recovery will probably fall short of the capacity mobilized during those heady days.
After a refractory period where production and activity levels decline, US shale oil and gas plays will gradually take market share from non-OPEC producers outside North America. Two factors make the US onshore market an ideal source of swing production: Shale operators can bring new wells on relatively quickly and with predictable success rates (dry holes rarely occur).
Excluding the US and Canada, non-OPEC output has drifted lower in recent years, despite massive capital expenditures and an extended period of elevated oil prices.
Spending cuts and reduced activity levels should accelerate the gradual decline rate in non-OPEC production outside the US, giving shale producers an opportunity to ramp up slowly once output reaches a sustainable level. Of course, Saudi Arabia and other OPEC members continue to invest and develop incremental production capacity.
Several other factors will constrain US demand for oil-field services and equipment.
Exploration and production companies have honed their drilling and completion techniques and processes considerably over the past few years, yielding major efficiency gains and cost reductions. Meanwhile, the remaining drilling and completion crews working in the field have the most experience and use the most advanced rigs available.
Not only can producers drill more wells with fewer rigs than they could a few years ago, but enhanced completion techniques—longer laterals, reduced spacing between fracturing sites and larger applications of silica sand—have also improved recovery rates significantly.
The US oil and gas industry has demonstrated a remarkable ability to do more with less, a trend that shows every sign of continuing. Of course, doing more with less in an environment where oil prices remain lower for longer will also reduce demand for some services and equipment.
Financial constraints also present a challenge. Many US exploration and production companies will focus more on balance sheet repair after taking on significant debt to outspend cash flow during the salad years when oil prices averaged about $100 per barrel. (See The Upstream Cash Flow Crunch.)
Bottom Line: Activity levels and pricing for oil-field services and equipment will likely remain under pressure in the US onshore market this year, with early 2017 bringing a bit of a recovery on both scores. But a return to the levels witnessed during the boom years appears unlikely, especially if Saudi Arabia opts to tap some of its spare capacity to take market share and keep oil prices in check.
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Elliott and Roger on Nov. 26, 2019
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