OFS margins improve in the third quarter amid mixed revenues

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       The third-quarter earnings of key oilfield service players indicate that the services market might have reached its trough. However, the recovery will be slow as operators head into another year of suppressed investments.

Although the third-quarter earnings show mixed results in terms of revenue generation, this quarter was a big test of service companies’ cost control. The cost reduction measures initiated at the start of the crisis seem to have proven successful, especially within the big three players – Schlumberger, Halliburton and Baker Hughes. All three have improved their adjusted operating margins in this quarter. However, these margins still trail below the 2019 numbers.

On revenues, Schlumberger at -2%, Halliburton at -7% and NOV also at -7%, recorded sequential declines in the third quarter, with all three pointing to lower drilling activity in North America as one of the drivers. On the other hand, Baker Hughes managed to grow revenues by 7% sequentially, thanks to its LNG-focused Turbomachinery and Process Solutions segment’s good performance. Other key players TechnipFMC, Saipem and Aker Solutions, also recorded sequential revenue increases. 

TechnipFMC led the pack with its third-quarter 2020 revenue matching a year earlier, while all other players witnessed double-digit declines compared to their 3Q19 revenues.

Given the short-cycle nature of the US land industry, companies with the largest exposure to this segment are also the ones that have seen their revenues drop the most in this crisis. Halliburton’s North American business accounted for 53% of its total revenue in 3Q19 but only 33% in 3Q20. Schlumberger has a lower North American exposure but also witnessed a similar trend, with its North American share of the revenue falling from 33% to 22% year-on-year.

One of the quarter’s key highlights was TechnipFMC’s impressive revenue growth of 6% sequentially, bringing its 3Q20 revenue on par with 3Q19 levels, as shown in Figure 2. The strong performance was driven by both the Technip Energies and Subsea segments of the company. The Subsea segment of the company reported an especially strong quarter, beating its 3Q19 revenue for this segment by 12%. TechnipFMC’s subsea business outperformed the market recently, generating $4.1 billion in revenues in the first nine months of the year, even beating the first nine months of 2019. The strong revenue is driven by strong backlog execution as TechnipFMC works through its record-high order intake from last year. Efficient cost measures have also paid off, with margins improving after taking a hit in the first half of the year.

Except for three major subsea awards, including OneSubsea’s Sangomar contract win at the beginning of the year, Aker Solutions’ Breidablikk contract from Equinor and TechnipFMC’s contract for ExxonMobil’s Payara project in Guyana, 2020 has been bleak in terms of subsea awards. These three projects make up 85% of the subsea trees awarded for 2020, as shown in figure 3. Payara, the largest subsea tree award since 2014, includes 41 enhanced vertical deepwater trees, six flexible risers and ten manifolds along with controls and tie-in equipment. This contract has boosted TechnipFMC’s order intake for 3Q20. TechnipFMC is also working with ExxonMobil on the Liza Phase 1 (30 subsea trees) and Liza Phase 2 (17 subsea trees) projects, having secured the subsea scope for both. 

While the third-quarter earnings indicate that the services market has hit rock-bottom and may be ready for a gradual recovery, service companies should prepare themselves for another challenging year in 2021. Continued uncertainty in the near-term oil price will likely cause the offshore market to stay suppressed into next year and activity levels will probably not start to recover before 2022.