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Default probability rises for oilfield services in 'unimaginably tougher' market

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Default probability rises for oilfield services in 'unimaginably tougher' market

Many oilfield services companies and drillers are at high risk of default after a crude oil price crash that pummeled their stock prices and is likely to diminish work opportunities as producers slash budgets.

In January, Bernstein analysts predicted 2020 would be a tough year for oilfield services companies. With the latest oil price crash, life for them has gotten "unimaginably tougher," Nicholas Green said.

Share prices of oilfield services companies and drillers got a beatdown March 9 along with oil prices, after Russia refused to agree to Saudi Arabia's demand for new production cuts, prompting Saudi Arabia to slash prices and signal it would ramp up oil production by more than 10 million barrels per day in April.

West Texas Intermediate crude oil prices on the NYMEX settled March 9 at $31.13 per barrel, down by 24.6% versus the March 6 close, and Brent crude oil futures prices settled 24.1% lower at $34.36/bbl. WTI crude oil rose $3.34, or 10.7%, to settle at $34.47/bbl on March 10.

The slide in crude oil prices could force exploration and production companies to slash capital and operational budgets as their cash flows shrink, which could result in massive earnings downgrades for a majority of global oil services companies. "The price shock will particularly affect companies with refinancing needs over the next 6 to 12 months," said Moody's Steve Wood, managing director for oil and gas, in a March 9 email.

According to the S&P Global Market Intelligence perception of default signal model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one- to five-year horizon, offshore driller Transocean Ltd. has the highest probability of default among oilfield services providers. In contrast, TechnipFMC PLC's likelihood of default stabilized and turned lower in March.

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Transocean and Valaris PLC require new financing and would have a difficult time surviving a lengthy price war, Green said in a March 9 note. Companies with strong financial health and modest distributions, and those resilient due to healthy order books, can easily weather another slowdown.

He said Baker Hughes Co. and National Oilwell Varco Inc. "are starting to look very interesting," as they still have excellent financial health.

Green said global oil and gas capital spending could be down approximately 25% in 2020, on a crude oil price range of $45/bbl to $50/bbl. At those prices, he said, global meters drilled would decrease about 30%, the U.S. rig count could touch 2016 lows of about 650 rigs, and offshore order intake could fall from 2019's peak of $31 billion to below $25 billion.

The shale industry could carry as much as $65 billion of the $100 billion spending reduction expected globally from exploration and production companies, Rystad Energy said in a March 10 report.

The services sector could see purchases drop by 8% this year if oil averages $40/bbl and by 15% in a $30/bbl scenario, Rystad said. If the volume war continues and the countries that make up the OPEC+ alliance do not agree on cuts in 2020, spending could decline another 7% at $40/bbl oil and 11% at $30/bbl oil, the analysts said.

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How quickly oilfield service companies can cut costs will determine their ability to withstand a prolonged price downturn, according to several analysts.

"This has become a question of survivability rather than profitability," Raymond James analyst Praveen Narra said March 10.

Following the March 9 sell-off, shares of Schlumberger Ltd. climbed 5.1% March 10 to close at $18.19, while shares of Halliburton Co. gained 6.3% to $8.66. Shares of Baker Hughes were up 10.1% at $13.76.