As crude oil prices continue to rise and give exploration and production companies confidence in a sustainable recovery, oilfield service companies should begin to prosper as U.S. land projects move forward followed by international land and offshore activity.
Reaching its highest levels since 2014, WTI crude oil futures recently topped $72 a barrel while Brent crude oil approached $80/bbl.
While trailing the $100/bbl price seen in 2014, prices are pushing exploration and production companies to focus on short-cycle U.S. land projects, with the onshore market expected to exceed the 2014 level by 2021, Bernstein analyst Colin Davies said in a May 16 note.
The recovery in international land activity is expected to take longer, likely not until 2023 or later, while significant offshore recovery is not expected at current price levels.
"Sustained $80/bbl can get us back there, but sub $70/bbl just is not enough even with lower costs," Davies said.
Peter Miller, former executive chairman of National Oilwell Varco Inc. spinoff DistributionNow, said that a lack of focus in the offshore market is a mistake. "There is a 7-year time-frame to get offshore going after years of underinvestment, and offshore production is expected to begin falling in 2020," he said before the Association of Energy Services Companies in February.
However, the overall improvement to the oil market bodes well for oilfield service companies. Halliburton Co. and land drillers should reap the benefits in the near term and Schlumberger Ltd and Baker Hughes should see advantages as the international and offshore markets improve, Davies said.
Capital expenditures for exploration and production companies often lead growth in the oilfield service sector, and as oil prices continue to rise, exploration and production companies looking for production gains should drive demand for rigs and investment in infrastructure, Davies said.
There has been significant activity in rebuilding the U.S. rig fleet since the steep decline of operating rigs to just 404 in May 2016. As of May 18, the U.S. rig count totaled 1,046, with 61 vertical rigs, 919 horizontal and 66 directional. Of that total, 1,023 rigs were operating on land and 19 rigs were operating offshore.
Davies said that how oilfield service companies address this demand is critically important.
For the land drilling companies, such as Nabors Industries Ltd. and Helmerich & Payne Inc., higher specification rigs will likely be in great demand due to the types of wells being drilled. "We will exceed the supply of higher specification rigs and the ability to upgrade into the demand," Davies said.
The Bernstein analysis assumes the industry will maintain reinvestment at around 90%, although CapEx rises substantially along with production and cash flow, he said. This could lead to oilfield service companies gaining substantial leverage in the quest to achieve higher payment for services and increased efficiencies. Davies said it could lead to a substantial rise in service costs of at least 20% for well cost inflation over the next two to three years and a well quality degradation assumption across the main plays at higher activity levels.
Miller said, while the rig count and near-term investment trends imply healthy U.S. land production, well depletion has to be taken into account.
At $70/bbl, U.S. production growth will slow early next decade, he said. However, production levels will follow activity at different price levels and there is substantial long-term upside potential under an $80/bbl framework, Davies said. He contends that the oil price will limit the upside in the long term, compounding potential for more U.S. production and cash flow, which would lead to even more wells and production through reinvestment.
Slower growth in land production highlights the need for offshore investment.
"You always have to think about depletion. Each year we lose 10 million barrels per day. The depletion curve is important. You have to have offshore [production]," Miller said.
Slower U.S. land production coupled with a decline in non-OPEC production outside of the U.S. sets up the slow but steady recovery internationally and ultimately in the deepwater, Davies said.
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