Get ready for deep cuts in oilfield service market

March 2020


Get ready for deep cuts in the oilfield service market



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March 18, 2020
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Russia’s decision to walk away from the suggested OPEC+ deal is sending shivers down the spine of the oil service industry, which was already troubled by the new coronavirus. Brent crude oil prices plunged to $31 per barrel and is currently trading at $30-35 per barrel after Saudi Arabia announced plans to flood the market with discounted oil. We will likely see a volume war until the next scheduled OPEC+ meeting in June. If no agreement materializes then, global exploration and production companies are likely to slash up to $100 billion off their capital and operational budgets to adjust to significantly lower cash flows this year.

We believe prices will experience extreme levels of volatility in the coming days as the market searches for a floor. Prices could go even lower than $30 per barrel Brent as the potential 2 million barrels-per-day surplus in the market in the second quarter of 2020 may grow even larger, depending on the production response from OPEC and Russia.

Prior to this market event, Rystad Energy forecasted that overall oilfield service purchases would stay flat from 2019 to 2020. If we end up with an average oil price of $40 oil for this year, oilfield service purchases would drop 8%, and at an average of $30 oil, purchases could slide as much as 15%. This is less than the 20% decline that we saw in both 2015 and 2016, but that was a drop coming from a much higher level and from budgets that have not been cost-scrutinized as much as budgets have been since that downturn. If OPEC+ continues the volume war and does not agree on cuts in 2020, and this lasts into 2021, we could see additional 2021 spending reductions of 7% at $40 oil and 11% at $30 oil.

In total as much as $100 billion could be cut away from the E&P companies’ budgets in 2020, and the reduction could grow further to $150 billion in 2021 in a $30 scenario as oil and gas companies scramble to save costs and salvage some profits. Now they will turn every stone and cancel every single non-revenue-generating activity. In the US shale industry as many as 5,800 horizontal wells could be cut in 2020, which would more than halve the number of wells from the 10,900 planned for 2020. As a result, the shale industry would carry the biggest burden of this supply shock by taking as much as $65 billion of the $100 billion spending reduction expected globally. Offshore activity will see more moderate cutbacks from the low oil price in 2020, with reductions mainly in exploration and infill drilling programs as ongoing developments move ahead as planned. The $25 billion originally earmarked for exploration spending in 2020 is likely to come down at least 20%.

In terms of  planned sanctioning activity, greenfield projects worth $191 billion were forecasted to reach final investment decision in 2020, but with oil at $40 and lower this is likely to come under pressure due to market uncertainty and will probably end up below $100 billion, affecting all regions and resource types.

The service sector that will feel the pain the most in absolute terms in 2020 is likely to be the well stimulation market, which is estimated to come down by $25 billion. Fracking and proppant companies will have a hard time securing any new work besides already contracted deals and some work related to completing drilled but uncompleted (DUC) wells. The second-most impacted segment will be other well-related work such as drilling tools, oil country tubular goods (OCTG), rigs, completion and intervention work. In total, $70 billion of the expected $100 billion in reduced spending is for well-related work.

Before the oil-price collapse, Rystad Energy forecasted that global floater demand would grow by 12% to 143 rig years this year from 128 rig years in 2019. An average 2020 oil price of $40 per barrel could reduce demand to 135 rig years, or 5% growth from 2019, while a $30 per barrel average could cut 2020 rig demand by 5% to 122 rig years. This means that as much as 15% of the intra-year demand for floaters is at risk. This would be on par with the decline of 14% we saw in 2015, although this was a drop coming from a much higher level and from cost structures and project portfolios that had not been scrutinized as we have seen over the past years since the previous downturn.

Unfortunately, if a volume war is allowed to continue throughout 2020 and 2021, a result would be a wave of bankruptcies and consolidation in the service market, where current debt obligations are set to grow 27% into 2021. The more financially sound companies are those with a low leverage and healthy order books from past wins in 2018 and 2019, which can steer through the storm. At the same time, it can be hoped that another deep downturn could finally complete the required consolidation in the market to create a more healthy supply chain in the recovery – because the service industry will rebound when all the cheap oil is exhausted from the market and when the market rebalances in 2022.