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Surveying the Oil-Field Services Landscape

By Elliott H. Gue on Dec. 1, 2017

Third-quarter results from oil-field service companies affirmed, once again, that the industry remains what Jeffrey Miller, CEO of Halliburton (NYSE: HAL), described as “a tale of two cycles” during the firm’s first-quarter earnings call.

Halliburton, Schlumberger (NYSE: SLB) and Weatherford International’s (NYSE: WFT) aggregate North American revenue surged 15.7 percent sequentially in the third quarter, while the trio’s international sales ticked up by 1.65 percent.

During Schlumberger’s third-quarter earnings call, CEO Paal Kibsgaard reiterated that activity levels in international markets had bottomed in the first quarter and cited the North Sea, Russia and the Middle East as areas of relative strength in the coming year.

Kibsgaard also highlighted the 14 or 15 final investment decisions made on upstream development projects as an encouraging sign and indicated that indicated that tendering activity in international markets had increased by 50 percent.

That said, this uptick comes off a low base, says nothing about the total value of these opportunities and tenders can take multiple years to translate into revenue overnight.

Meanwhile, excess capacity and cost deflation continue to present challenges in international markets, as oil-field service outfits compete to win a smaller book of business. Kibsgaard acknowledged these realities during the Q-and-A portion of Schlumberger’s third-quarter earnings call, but also indicated that “the downward trend of pricing is slowing significantly.”

Although incrementally more positive in his outlook than some of his peers (likely a product of Schlumberger’s international-weighted revenue mix), Kibsgaard didn’t make any claims about a potential recovery in international markets.

Given the need for further cost deflation and visibility on oil prices for a meaningful pick-up in the multiyear development projects that predominate internationally, this market could bump along the bottom for some time.

Jefferey Miller, CEO of Halliburton, acknowledged these challenges and contrasted them to the North American market in his prepared comments for the company’s third-quarter earnings call:

Turning to the international markets, outside North America, our more conservative outlook for the last several quarters is proving accurate. Our customers around the world have different breakeven thresholds and production requirements, but all face the headwinds of the current commodity price environment. Due to lower cash flow and project economics, they are more focused than ever on lowering costs. The result of this combination is less activity and more pricing pressure.

In contrast to North America where we believe that a $50 oil price drives significant activity, customers tell me the longer duration international markets will react less to absolute oil price, but more to a positive view of where price will be for several years. This isn’t surprising given the longer investment cycle that many of our customers face.

Halliburton grew its international revenue by an industry-leading 4.2 percent sequentially in the third quarter, suggesting that the company is taking market share. However, Miller argues persuasively that the North American market offers the best near-term opportunities, given its shorter-cycle nature and the inflection point around $50.

Pricing gains in Halliburton’s pressure-pumping business slowed in the third quarter, which management attributed to a bit of a pause in activity levels when oil prices slipped into the $40s per barrel. Meanwhile, CEO Jeffrey Miller echoed Paal Kibsgaard’s warning that fourth-quarter US land results would moderate because of seasonal weakness and customers exhausting their budgets.

However, Miller highlighted the oil-field service giant’s “encouraging discussions” with customers and reminded analysts that “$50 oil through the planning cycle is a good thing.”

The CEO also described two prevailing philosophies in the upstream segment: operators that are “very focused on returns” and “others that are going to shoot the moon because they like the acreage that they have.”

Miller’s comment acknowledges the much-ballyhooed shift in focus among some US exploration and production companies and speaks to the importance of service providers that can drive efficiencies for themselves and their customers. In this environment, economies of scale and innovations that enable customers to do more with less will win incremental business and push prices.

 

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