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Oilfield service companies feel pinch of underinvestment despite improving E&P

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Oilfield service companies feel pinch of underinvestment despite improving E&P

Needing investment to meet the growing demands of exploration and production companies, oilfield service companies continue to struggle for funding while E&Ps have seen revenues rise.

Speaking at the Association of Energy Service Companies Annual Winter Meeting in San Antonio on Feb. 23, Scott Milliren, CEO of Commander Oilfield Services, a services provider for completions and production activities, said there is a sense of recovery created by $60-per-barrel oil but said it is a false sense of making money.

"The hands see the activity and translate that to 'hey I need a raise' and sales guys say 'hey I don't have to sell at 2% margin I can go to 5% or 10% now,' but oilfield service guys are not able to raise their rates," he said.

Oil and gas exploration and production companies are not only surviving in 2018, they are growing as the price of crude oil climbs and cost reductions drive break-even costs down 30% to 50% from early 2015 levels, Deloitte analyst John England said in a 2018 outlook on oil and gas.

However, oilfield service companies have yet to feel the impact of the market recovery on their bottom lines. Operators are pressuring delivery services, wanting higher standards and asking for more and bigger equipment, while the full-on recovery is not there, Milliren said. "Costs increases and rates are not going up in parallel, so there is a pinch. There is a lot of revenue being generated but very slim margins."

Since the 2016 crude oil price recovery, field operation trends show an increase in the need for redundancy and greater horsepower in fracking and well-servicing equipment. "It was not too long ago that only drilling rigs had pipe handlers. Now companies in completions are wanting to put pipe handlers on well-service rigs. These are all capital expenditures that many companies don't have the ability to fill right now."

The need for labor poses another challenge to the oilfield services industry. John Daniel, vice president of institutional research at investment firm Simmons & Company International Ltd, said the U.S. land rig count will reach 1,100 by 2019 and the 100-rig gain could mean frac-completion crew counts rising by 400 to 500 per day over the next 18 months.

Industrywide, oilfield service companies are struggling to find qualified workers after the last industry downturn in 2014 drove forced retirements and layoffs that scrubbed 400,000 workers, many of whom permanently left the industry. To bring workers back, oilfield service companies need to pay higher wages and customers need to understand that, Daniel said.

Providing crews and services takes capital, which many oilfield companies are lacking amid nuanced pricing that has allowed some sectors, including pressure pumping, to see significant price recovery while others, including well service, have yet to see improvement.

Institutional money is tight across the energy space, as investors are leery because of lackluster returns. "Energy stocks as a percent of the S&P 500 today are about 5.6%," Daniel said. "In the past, rates were in the low- to mid-teens." Exploration and production companies are being asked to show discipline in spending as investors are looking for returns in the form of dividends and buybacks.

Many in the oilfield services industry continue to suffer amid the conservative spending environment, and further consolidation may be in the cards, England said.

The oil well servicing industry is one with a particular need for consolidation, Daniel said. "There are too many of you. Something has to change." Consolidation would help improve oil well service company profits by allowing prices to go higher, he said.

Amid the challenges, an underinvestment in rig fleets could present opportunities for oilfield service companies. "From a capital expenditures perspective, the industry needs to spend more money to reinvest in equipment and reinvest in people," Daniel said. Capital expenditures from land drillers will also rise, and private exploration and production companies that do not have to answer to investors offer good opportunities for the oilfield service sector in the short term.