The current challenges in the oil services sector: Some notes on the 3 giants
By: Ari Blumenfeld
A cautious optimism.-
In 2020, as demand for crude plummeted due to pandemic restrictions, so did oil company budgets, leaving them with less money to invest in evaluating deposits, drilling new wells and the maintenance of existing ones, all of which they normally subcontract to companies specializing in oil services. Between January and June, the number of active rigs worldwide halved to just over 1,000. On January 19, Jeff Miller, CEO of Halliburton, one of the service industry giants, called last year “the worst in our history.” The company’s revenue fell 36% to $14.4 billion, leading to an operating loss of $2.4 billion.
Still, Miller insisted, they are beginning to see the light at the end of the tunnel. He predicted “a multi-year up cycle” beginning in 2022. On January 22, Olivier Le Peuch, chief executive of arch rival Schlumberger, echoed this sentiment, declaring “a new growth cycle.” And a day earlier, executives at Baker Hughes, the world’s third largest carrier, struck an equally positive note. The question is: is this optimism grounded? Recent history gives one reason to be skeptical. Although Halliburton’s share price has almost recovered to its pre-pandemic level, it is still a third of what it was in 2017. Schlumberger and Baker Hughes have performed only slightly better. The three companies combined have lost $128 billion in shareholder value over the last four years, as low fossil fuel prices have squeezed oil company budgets.
Competition and other challenges.-
At the same time, many new players appeared in the market, particularly in the shale gas fields of the United States. According to Accenture, global industry rankings show that the number of companies in the sector increased from about 100 in 2014 to almost 1,000 last year. And all that competition meant that most of the efficiency gains went to customers in the form of lower prices. The sector’s gross operating profits halved between 2014 and 2019, according to research firm Bernstein. And then, to top it off, came Covid-19.
Long-term risks, beyond the pandemic, look daunting. It is not foreseen that the big oil companies will invest in new platforms, neither in the short nor in the medium term, even if there are increases in the price of oil. Investors are more interested in cash flow than in new ventures. On the other hand, governments are taking climate change increasingly seriously. On January 27, President Joe Biden announced an indefinite pause for new drilling permits across the United States.
The opportunities and a possible medium-term vision.-
A very interesting point to note is that, in general, oil service companies are not attractive acquisition targets. Unlike an oil company, which, when it buys another, acquires land that can be drilled, when a service company acquires another, it acquires more platforms and equipment, which it already has in abundance. According to Moody’s, the three giants have “too many assets chasing too little cash flow.” Clearly, there is an oversupply and it would seem that the market can’t stand so many players.
However, even a shrinking market offers opportunities. All three giants have spent 2020 cutting costs. Schlumberger laid off 21,000 workers, a fifth of its total payroll, cut its dividend by 75% and said top managers would voluntarily give up 20% of their pay. He has enough cash, like his two rivals, to invest in improving his services to traditional customers. On the other hand, all three companies are expanding into new and cleaner niches. In November, Baker Hughes said it would acquire a carbon capture company. Schlumberger has created a “new energy” business unit, and earlier this year one of its joint ventures in France, which makes equipment for clean hydrogen production, received approval from the European Union.
Who knows. The answer is probably in the diversification of their portfolios of energy sources. Perhaps along that path they will find a new blue ocean.
Sources:
- Are oil-services companies doomed? (The Economist, Jan 2021)
- Oilfield service companies see drilling rebound everywhere but the US (WorldOil, Jan 2021)
- Oil services companies signal worst is over for sector (Financial Times, Jan 2021)