A fundamental shift in the North American oilfield services industry will hurt pricing and margins for companies operating within the sector. As challenges persist, mergers and acquisitions within the space may provide hope for service companies' survival, S&P Global Ratings said July 30.
S&P Global Ratings' sector outlook is negative and the agency, as of July 29, has a negative outlook on 47% of the companies that it rates within the sector. Further negative rating actions are possible, the agency said.
Supporting the sentiment, North American producers, driven by shareholder pressure, have curbed their capex spending. Instead, the companies are focused on aligning capital spending with cash flow and improving their corporate returns.
Ratings sees total capital spending by the 46 North American exploration and production companies it rates at about 5% to 10% lower year on year in 2019, contributing to the negative market sentiment.
Operational efficiency and well-productivity gains add to the negative market environment as producers achieve more with less.
These higher efficiencies put negative pressure on oil-rig demand, but high-spec land rig utilization remains robust and supports increased pricing. Patterson-UTI Energy Inc., Helmerich & Payne Inc. and Nabors Industries Ltd. each reported healthy utilization rates for their super-spec fleets during the second quarter. However, demand for older rigs declined.
Services companies and drillers will likely need to stack or scrap their lower-specification equipment to improve supply and demand fundamentals.
Meanwhile, the number of active frac spreads in the market totaled 439 as of July 26, about flat with year-end 2018 but down 9% from the April peak of 482 spreads.
The number of spreads increased in 2017 and 2018 as pressure pumpers added new build capacity when market fundamentals and pricing looked to be improving.
But when prices crashed in late 2018, companies heavily exposed to the pressure pumping market began struggling with an oversupply of equipment, S&P Global Ratings said.
Under the weight of supply, prices were weighed down, with no meaningful improvements expected in the near-term, the rating agency said.
To ensure their survival, oilfield services providers are fighting for increased scale, market share and synergies, S&P Global Ratings said.
The merger of Keane Group Inc. with C&J Energy Services Inc. demonstrates the appetite to scale up in pursuit of increased synergies and resources, Ratings said.
Stock prices for both of the pressure-pumper focused companies were hovering at multi-year lows at the time of the announcement. Instead of waiting for higher prices, they combined to "hunker down and weather a potentially prolonged period of tough conditions," Ratings said.
When the deal is complete, the combined company will be the third-largest provider of pressure pumping services in the U.S. after Halliburton Co. and Schlumberger Ltd.
An increase in merger and acquisition activity could follow.
With the sector clearly out of favor with investors, external financing has been more difficult to come by, which may also be a catalyst for M&A, S&P Global Ratings said.