Growing Permian drilling and production started lifting last year the revenues and profits of the world’s top oilfield service providers who were badly bruised by the 2014 oil price crash.
Schlumberger, Halliburton, and Baker Hughes saw their earnings in the past few quarters lifted by the return of frenzied drilling in North America, led by the Permian basin, while international operations lagged amid slower recovery in global investments in exploration and production.
In July this year, the mood at Schlumberger and Baker Hughes in Q2 earnings was an upbeat outlook for the immediate future, with signs that the international market outside the U.S. was also on the road to recovery.
But the top oilfield service providers started warning in September that the Permian constraints would temporarily slow down activity in the most-active U.S. shale region.
Luckily for all three of them, the international business looks increasingly positive as global spending on exploration and production is beginning to recover, rising this year—albeit slightly—for the first time since 2014.
Analysts expect all three top oilfield service companies to report higher earnings for the third quarter compared to last year, but they have been cutting their projections in recent weeks due to the takeaway capacity constraints in the Permian expected to reduce drilling activity.
“In North America, lack of additional pipeline capacity in the Permian Basin is becoming an increasing constraint to production growth,” Schlumberger Chairman and CEO Paal Kibsgaard said as early as in July on the Q2 earnings release.
In September, Kibsgaard said at the Barclays CEO Energy-Power Conference that the market consensus that the Permian would continue to provide 1.5 million bpd of annual production growth for the foreseeable future “is now starting to be called into question.”
“In fact, so far in the third quarter, the hydraulic fracturing market has already softened significantly more than we expected in spite of the overall rig count holding up relatively well,” Schlumberger’s head said, but added that international E&P spending has been picking up pace in the second half of the year.
At the same conference in early September, Jeff Miller, CEO at the leader on the U.S. fracking market, Halliburton, said that in order to overcome takeaway constraints in the Permian, “some operators will re-allocate capital to other basins, some will slowdown, other will build ducts.”
As early as in Q2 earnings, Halliburton had warned about a downturn in activity in North America due to budget constraints and takeaway issues.
“There has been and it’s more than we expected,” Miller said last month, adding that weakness in pricing in several basins plus project delays in the Middle East would impact Halliburton’s Q3 earnings by between $0.08 to $0.10 per share.
But international markets are recovering, and this is where the top three oilfield service providers would look for more drilling and activity.
Baker Hughes CEO Lorenzo Simonelli said at the September Barclays conference that global E&P spending is expected to grow at a healthy pace over the next three to four years.
“We are also seeing the beginnings of a recovery in the international markets. We’re expecting offshore activity to see a healthy rebound as well. It will likely remain significantly below prior-cycle peak levels but at the same time we see improving activity, and importantly, more stability as we look into the next few years,” Simonelli noted.
Both Baker Hughes and Halliburton see the North Sea and the Middle East as the key growth areas internationally, although Halliburton’s Miller warned in July that “How much improvement and how quickly it comes will depend in large part upon commodity prices and equipment absorption.”
Higher oil prices and lowered development and project costs have led to cautious optimism and measured risk-taking within the industry that is set to see an uptick in global oil investment this year, energy consultants Wood Mackenzie say.
Rystad Energy expected in May that 100 new offshore projects are likely to be sanctioned this year, compared to just 60 projects in 2017 and fewer than 40 in 2016.
The world’s top oilfield service providers will be betting on international E&P spending recovery, while they are waiting for the Permian constraints to abate, probably sometime at the end of 2019.
"…while the current Permian takeaway constraints in North America should be addressed within the next 12 to 18 months, a series of reservoir- and production-related challenges is emerging in the US shale basins that could dampen the most optimistic production growth projections," Schlumberger’s CEO said today in its press release on its Q3 earnings.
By Tsvetana Paraskova for Oilprice.com
