While exploration and production companies pressure oilfield service companies to maintain low rates, fourth-quarter and full-year 2017 earnings reported by well service providers indicate market conditions could be recovering from a three-year downturn.
Exploration and production companies are closely watching their bottom lines and are focused on delivering sustainable profitable growth from existing acreage and funding those operations within their cash flow. To realize production improvements, operators are calling on well service companies to provide advanced technologies such as drilling longer laterals and increasing proppant volumes during fracking operations.
"Since the beginning of the year, we are seeing demand strengthening broadly across all basins," Ranger Energy Services Inc. CEO Darron Anderson said during a March 6 earnings call. Focused on horizontal completions and producing wells, Ranger took delivery of six new high-spec rigs and launched a completions-focused wireline business in the Permian Basin in the fourth quarter of 2017. Subsequently, it purchased 15 well-testing spreads to support the company's horizontal drill-out solution and further its expansion into the completions space.
Drilling and completion is where market analysts see growth opportunities for oilfield service companies through 2018. Jefferies analysts see the greatest growth opportunities in pressure pumping over the next six months and land drilling over the longer term.
In a March 16 note, Jefferies analysts said first-quarter guidance from pressure pumpers has taken care of winter seasonality and negative capital expenditure surprises have been considered.
Consequently, the analysts believe that a rising rig count since December 2017 and generally favorable seasonality in the second and third quarters should underscore continued tightness in the fracking market as fuller fleet utilization brings better revenues and stronger incremental margins for pumpers. The analysts believe that the hydraulic fracturing market is still undersupplied by about 400,000 hydraulic horsepower.
Analysts with Bernstein said the outlook remains robust for pressure pumping in the near term, but they see supply discipline as a risk to pricing gains.
"The market recognizes that the biggest risk to the pressure pumping market is supply discipline (or lack thereof). Discipline is the name of the game for continued pricing gains in this fragmented, low-barriers to entry market," Bernstein analyst Colin Davies wrote in a March 8 note to clients.
Jefferies analysts also expect that land drillers will continue to benefit from a multitude of one-year rig contracts that were signed in spring and summer 2017 at rates of $16,000/day to $18,000/day, repricing up to current leading-edge day rates of $22,000/day to $24,000/day for super-spec rigs.
Jefferies forecasts a 30% year-over-year increase in spending on oilfield services by exploration and production companies.
"On a product/service line specific basis, we see total industry spending on Hydraulic Fracturing up 46% (including some benefit from using regional sand in fracking jobs), drilling rigs up 24% and everything else up 17%," the analysts said.
The global oilfield services sector will continue its recovery into 2018, with EBITDA growing by as much as 10% to 12%, but the overall health of the sector will remain frail, Moody's analysts said in a Jan 2 client note.
Higher equipment utilization has set the stage for improving oilfield services pricing in 2018, but the biggest gains in margins and cash flow will not come until later in the year, when oversupplied oilfield services markets align more closely with demand, Moody's said.
Oilfield service companies will still have to contend with ongoing pressures from customers focused on capital returns, additional costs for reactivation and upgrades, and increasing hiring and training costs for labor.
With activity increasing and labor tightening, Ranger, along with a number of other well service providers, reported pursuing price increases across their lines of business and are seeing those price increases reflected on their bottom lines.
Pioneer Energy Services in its Feb. 16 earnings report said it expects a 10% to 15% increase in revenue from its production services business in the first quarter compared with the same quarter in 2017 and sees margins at 24% to 26% of first-quarter revenue. The company projected that first-quarter domestic drilling services rig utilization would be close to 100%, which would generate average margin per day of approximately $9,400 to $9,700.
While Ranger implemented some price increases during the fourth quarter of 2017 and thus far in the first quarter, Anderson said the company would not see the full benefit until the second quarter.
Oilfield Service major Halliburton Co. will report first-quarter earnings April 23.