Shale oil producers are under fire from investors, while most analysts see a supply glut in 2020.
By Nick Cunningham, Oilprice.com:
The first and third-largest oilfield service companies in the world saw their earnings hit in the third quarter due to the slowdown in U.S. shale drilling.
Schlumberger took a $12.7 billion impairment charge related to its North American business, a rather dramatic write-down. That led to an $11.4 billion loss for the quarter, the largest in the company’s history. “That’s a sizable writedown from pressure pumping business. That just tells you the state of the North American onshore market being pretty poor,” said Anish Kapadia, founder of oil and gas consultancy firm AKap Energy.
Halliburton also saw its earnings hit by the slowdown in shale drilling and the oilfield services giant shifted its focus to international markets as the signs of a shale rebound do not appear to be imminent.
Rig counts have fallen sharply over the past year, down more than 20 percent from late 2018. The number of wells drilled has also declined and production growth has dramatically slowed. Halliburton said that its third-quarter revenues from North America plunged by 11 percent from the prior three-month period as shale E&Ps cutback on activity.
“US and international markets continue to diverge,” Halliburton CEO Jeff Miller said on an earnings call on Monday. “International activity growth is gaining momentum across multiple regions. Meanwhile, operators’ capital discipline weighs on North American activity levels.”
Miller said that he was “excited” after visiting Halliburton customers in the “eastern hemisphere,” and that the company sees strong growth in Europe, Asia, and Australia.
But the mood surrounding U.S. shale was entirely different. Miller noted that the U.S. land rig count fell by 11 percent between the second and third quarters, the sharpest contraction for the time of year in a decade. “While, historically, the third quarter used to be the busiest in terms of hydraulic fracturing activity in the US, stage counts declined every month this quarter,” Miller said.
He added that because oil producers themselves are under fire from investors, they are haggling with service companies (like Halliburton and Schlumberger) for lower prices.
Halliburton stacked more equipment in the third quarter than it did in the first and second-quarter combined. “While this impacts our revenues, we would rather err on the side of stacking than work for insufficient margins and wear out our equipment,” Miller said.
Schlumberger echoed Halliburton’s description of the divergence between U.S. and international markets.
The outlook going forward does not look any better. WTI is in the low-$50s, with little signs of life. Worse, most analysts see a supply glut in 2020, which seems to pose more downside risk to oil prices than upside.
In the fourth quarter, “we expect customer activity to decline across all basins in North America land, impacting both our drilling and completion businesses,” Miller warned. Low natural gas prices are also adding to the industry’s woes.
Schlumberger’s outlook was similar. “We are anticipating a year-end slowdown in North America similar to last year due to operator budget constraints,” Schlumberger CEO Olivier Le Peuch told investors on its earnings call. But, the deceleration in 2019 “started earlier” and will be “more pronounced” compared to last year, he said.
Le Peuch said that U.S. oil production growth rate has declined for the last eight months, and will declined further in 2020. “That’s sort of a recession,” Le Peuch said, but “the prospect for international activity growth remain firmly in place.” He did caution, however, that activity could decline in Ecuador and Argentina, both of which are facing political and economic headwinds that could impact the oil industry.
Miller said that Halliburton will undertake “further cost reductions,” which could save $300 million. Less than two weeks ago, the company said that it was laying off 650 workers across Colorado, New Mexico, North Dakota and Wyoming.
Halliburton’s share price jumped roughly 7 percent after its earnings release on Monday, most likely related to the pledge for more “cost-cutting,” which may turn out to be a euphemism for more layoffs. The company declined to offer more details on this plan when pressed by analysts on its earnings call.
Evercore ISI analyst James West, who was on the call, said Halliburton was “showing leadership by walking away from unprofitable or low return work.”
The oilfield services company is one of the largest in the sector, and its chief executive argued that it could essentially batten down the hatches and ride out the storm. Smaller competitors will get dragged under, and the attrition has and will continue to take hold. Halliburton’s size allows it to “flex down with the market,” Miller said.
Ultimately, the problems afflicting Halliburton and Schlumberger are illustrative of the broader slowdown in the shale industry, weighed down by debt, lack of profits and increased investor scrutiny. This has already translated into slower oil production growth. “The record-breaking 2018 growth will not be replicated in 2019,” Miller said. “In fact, current projections for 2020 indicate a further decline in production from the current-year estimates.”
Miller saw the upside in this. Slower oil production from the U.S. might mean that activity will need to pick up internationally in order to fill the gap, something that ends up offering opportunities to multinational oilfield service companies. By Nick Cunningham, Oilprice.com
How cash-burn machines, including shale oil and gas drillers, power the real economy, and what happens to that economy when investors refuse to have more of their cash burned. Read… THE WOLF STREET REPORT: Here’s What I’m Worried About with the Everything Bubble
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Shale oil inversion have a grey future.
Between Weatherford, Baker Hughes, Schlumberger and Halliburton – over half of worldwide oilfield services is dominates by these 4 companies.
How much do Halliburton and Schlumberger dominate US shale?
And how much pricing power do the big oilfield services players hold?
I always wonder at these details, particularly after an oil industry guy told me just how radically the overhead costs escalate. If oilfield services is an oligopoly, that points to a very different industry dynamic than just cheap financing.
When you talk about “rig count” for shale oil, what do you mean exactly? I ask because it’s my understanding that one “rig,” can have multiple drill heads both vertically and horizontally. As a result, you need fewer of what were traditionally called rigs to get the same production.
Thanks.
J.
Rigs are used to explore for/develop oil/natural gas. The rig count is the number of rigs actively doing this.
Production can sometimes go on for decades.
According to Bluegold Research, U.S. dry gas production will reach a major long-term peak in November this year and will then remain flat for at least 12 months.
On hold, in reverse repo, waiting for more troops.
Wonder how bad it will get if crude drops say 40 to 50 percent in a deep world wide recession
I suspect OPEC (Saudi Aramco in particular) will cut back production to get the worldwide demand back up. That seems to be the usual game plan, but then U.S. producers will complete many of the thousands of wells drilled and capped (waiting for completion) to capitalize on the price upswing.
The Saudies have cut their production from a peak of just over 12 M barrels to around the current estimate of 10Mbd !
The situation could be worse than that ! As the Saudies are Not known to be transparent in their production figures. and their facilities that were hit recently haven’t come into line as well!!
Further production cuts will hurt any prospects to float part of Aramco!
The planned “ domestic IPO” ( a minuscule trial forced on Rich Saudi Families). Will Not be convincing enough to open the Investing Appetit to the real perceived value of Aramco.
So in reality they’re caught between a rock and a hard place!
Rise production to plug the huge holes in their budget or cut production and Aramco’s IPO value is at risk of a sizable downgrade!!!
All thing said, Iran is Flooding Asia with cheap oil! Paying for their imports is primarily done by Cheap oil.
So yeah , the Fracking fraternity in the US will have tough time to source and funds to burn.
Thank You Nick, contributors, great work.
Flexing down with the market is akin to being flushed down the toilet. Shale is a failed business model with companies hemorrhaging cash for years. It’s now a culmination and realization of needing to cut losses before it’s too late. Oil is barely holding $54 as of today and that’s only because the stock market continues to be propped up. There was a time when OPEC was extremely fearful of shale oil production. That doesn’t exist anymore as they have their own problems with over supply.
A $12.7B write down by Schlumberger tells you investment has gotten way too optimistic in this industry. I don’t think I’ve ever seen a write down that large in my lifetime, that I can recall.
Bobber,
Time Warner wrote down its purchase of AOL by $97 billion in about 2003, if I recall correctly. There were some other big ones since then. By comparison, $12 billion aint bad :-]
AOL was bought with overvalued stock that went wrong because the Baby Bells stopped Local Loop Unbundling. This seems to be a real hard dollar investment that went wrong.
There were multiple big banks that had to write down their mortgage portfolios during the subprime crisis. I’m certain some of these were much larger than $12B.
The expert commentors at Peakoilbarrel state that 2019 sees US Shale peaking. Of course a spike in price will increase activity and excitement, but since the Shale model does not make money what’s the point? Regardless, these are industry folks who rely on production stats for their conclusions…well worth a visit.
A comment example: “Another article shale bonds
https://seekingalpha.com/news/3507122-frackers-float-mortgage-bond-like-security-capital-needs-intensify
Frackers float mortgage bond-like security as capital needs intensify
Oct. 20, 2019 10:32 PM ET|About: Schlumberger Limited (SLB)|By: Douglas W. House, SA News Editor
Desperate for cash, shale companies are banking their capital-raising hopes on a new type of financial instrument that resembles mortgage bonds.
Specifically, it is an asset-back security involving existing oil and gas wells. Producers transfer ownership interests in the wells to special entities that, in turn, issue bonds to be paid off with output revenues over time. Current yields on the highest quality wells are almost 6%, but are higher on riskier assets.
The first offering, by Raisa Energy LLC, closed last month. Several others will follow by year-end.
A range of yield-seeking institutional investors have expressed interest but modeling future production is challenging due to the complex geology of shale basins and large variability between wells according to engineers.
The Wall Street Journal previously reported that thousands of wells drilled in the past five years are less productive that forecast.
Producers have burned through more than $100B since 2014. Existing investors have almost completely cut off the money faucet and banks are expected to lower their credit lines in the coming months.”
http://peakoilbarrel.com/open-thread-petroleumoctober-20-2019/#comments
Worth a read and bookmark for sure.
They have improved drilling efficiency drilling more laterals from single pads with more frac stages per lateral.
US oil production continued to grow. Lack of pipeline capacity limits production growth. More pipelines are under construction.
Chesapeake used to be a leading holder of oil and gas acreage. They hoarded too many acres and took on too much debt. Their CEO committed suicide after energy prices plummeted.
“Read… THE WOLF STREET REPORT” Given that it’s a video, wouldn’t “watch” be more apt than “read”?
It doesn’t even have automatic captioning, which is strange on YouTube.
Olivier,
Yes, well, should probably be “listen.” Because — thank goodness — you cannot see me.
I’ll post the transcript on Wednesday. I’ll work on it later today and should be able to get it done. Then you can read the whole thing in real English (well, my version of it) and not in Google-gobbledygook, or henceforth “googledygook.”
“googledygook.”
Nice. I’m taking that for future use.
Shale’s problem is free money.
It costs central bankers nothing to print money.
Consequences there are.
Central banker’s shale wisdom gives free money to shale primary to produce shale.
Primary sees Something for Nothing.
Primary contracts out production of shale.
Producer sees Nothing for Something, goes broke.
Shale converges toward value of free money.
What could possibly go wrong?
Then why is gas at $4.50 a MF <-(emphasis added) a gallon here in Cali!!!??
Aaron,
The Governor wants to know too!
California is not connected by pipeline to any of the producing areas east of California. So that’s part of the problem. California produces its own oil, gets some from Alaska, and imports the rest from other countries.
California is also a big exporter of gasoline and diesel that it refines from imported crude oil. So, more broadly, to answer your question, I would say, collusion between the oligopoly of oil companies here.
Because California gas is formulated differented, due to CARB regulation, than gas anywhere else.
So regardless of pipelines – the issue is refinery capacity, specifically CA-gas specific refinery capacity.
More oil from anywhere else would make zero difference.
The recent spike is due to one of the few refineries having major issues.
clue,
California has lots of excess refinery capacity because it is a large exporter of refined petroleum products, particularly gasoline and diesel, mostly to Mexico and Latin America. I see the fully loaded tankers go out the Bay all the time. If it didn’t export that gasoline, the state would be drowning in it. Refineries in the Bay Area are a for-profit business — they import crude oil and export gasoline, and also supply some gasoline locally at the highest possible price. There have been allegations of collusion for years.
If you want to understand prices at the fuel pump you need to look into tax code, not oil market value. The product being traded is not the same product you consume. You likely pay a lot more in tax because that is the tax on emissions being applied or because roads need more funding. Any excuse to pry money from consumers in your state or province, depending on where you live.
If you believe the “transport fees” excuse then you are looking in the wrong isle. Taxes can increase 10-20 cents per gallon on a whim, but transport increases may only go up a penny every few months.
Here’s the thing. If there is so much economically viable oil remaining (i.e. conventional oil) then why are we sucking up the dregs and losing money on every barrel produced in the shale patch?
Food for thought.
Why are so many societies wasting money and resources building more highways and roads for polluting cars, instead of making cities more livable/cleaner/walk-able? It comes down to marketing and moneyed vested interests.
Oh, and if anyone things solar and wind are going to save the day when shale peaks, this MIT research nixes that idea:
The $2.5 trillion reason we can’t rely on batteries to store energy
Fluctuating solar and wind power require lots of energy storage, and lithium-ion batteries seem like the obvious choice—but they are far too expensive to play a major role.
https://www.technologyreview.com/s/611683/the-25-trillion-reason-we-cant-rely-on-batteries-to-clean-up-the-grid/
That is why people are working on things like reversable fuel-cell storage and batteries based on things like Quinol-quinone oxidation states. Their energy density is much lower then lithium ion, but the value of energy density afforded by lithium ion is only useful for portable devices – cities and the grid are not portable. Quinol-quinone are useful because while relatively low energy density, they can be produced on a very large scale very cheaply, and if well designed might be able to go through 10,000 or even 100,000 recharge cycles before needing to be replaced compared to the ≈ 600 that is the usual limit for lithium ion.
Yes I hear they have been working on Hydrogen Fuel Cells for decades now.
People seem to believe technology can conquer all.
Sorry to break the bad news to all of you but technology has it’s limits.
People point to the things that technology has solved. For example, we have learned how to grow a LOT more food by adding chemicals to the soil that has ruined the soil and made it more reliant on chemical inputs.
We continuously throw more and more pesticides at bugs on our crops to the point where we are basically soaking them with toxic chemicals every couple of weeks.
Hardly a solution.
Then there is the fact that computing power is no longer following Moore’s Law. Google that one. It’s a great example of how tech has limits.
Perhaps battery technology problems is just one of those things that are just impossible to overcome.
Kinda like how there is no elixir that gives eternal life and literally infinite numbers of things (if you thought about it and made a list) of things that just cannot be done.
Wake me up when someone invents an energy storage device that works and is cost-effective …. zzzzzz……
The proximity of the Mojave open spaces and the Sierras is just begging for a really monster sized off the shelf solar/wind energy generation and hydro electric storage facility.
The kind of thing large corporations used to be chartered and formed for. Back when our laws used to allow them to exist only for the public good.
I’d be quite fine with oil prices doubling. Get it back over $100, producers are happy, oil producing countries/states/provinces are happy, alternative energy becomes more attractive, US dollar goes higher. Indeed, as a finite resource, oil is far too cheap.
Be careful what you wish for:
HOW HIGH OIL PRICES WILL PERMANENTLY CAP ECONOMIC GROWTH
For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil production has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.
http://www.bloomberg.com/news/articles/2012-09-23/how-high-oil-prices-will-permanently-cap-economic-growth
Rat Fink,
These nonsense pieces keep circulating around. We had $100 oil till mid-2014 and the economy was doing just fine, thank you.
Oil is not used in power production — it’s used for transportation and chemicals. When oil doubles, the price increase of goods that contain plastics is minimal. Yes, transportation can get a little more expensive – favors local production, smaller more efficient vehicles, and the like. That would be a good thing. It would boost inflation by a little, and the Fed would love that.
Also, the US is the largest oil and gas producer in the world — this being a huge industry with massive orders for equipment manufacturers, transportation services, construction, pipeline construction, supplies, housing, etc., with a big high-tech component and a highly paid work force that freely spends and recycles the money it earns to boost other parts of the economy. Overall, the US would benefit from higher oil prices. This money would mostly stay in the US (see the list earlier in this paragraph). It’s the REAL ECONOMY with US-produced products (hydrocarbons, equipment, supplies, etc.).
There is a limit, of course, as how expensive oil can get before the price becomes disruptive, but $100 a barrel we already know from prior years is NOT that limit.
That said, fracking is terrible for the environment – but so is mountaintop coal mining or pit mining, or nuclear power (Fukushima), or damming up big rivers and canyons, or just about anything else. When it comes to power and energy, there is no free lunch, only more or less bad choices.
Here’s another ‘nonsense’ article straight from the IMF.
1. The economy can tolerate high oil prices for short periods of time – I will agree with that – but as the article indicates ‘sustained high prices’ destroy the economy.
2. Oil is involved in every single thing people purchase. If the price hits $100 for a sustained period the price of everything will increase. Also the price of filling up an SUV will increase and people will spend less. They cannot magically trade an SUV for a Mini (and they’d get killed trying to flip an SUV with oil priced through the roof.
3. People can of course take on debt to deal with the pernicious effects of a sustained major increase in the price of oil. That’s exactly what happened in the run up to 2008.
HIGH PRICED OIL DESTROYS GROWTH
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.
http://www.iea.org/textbase/npsum/high_oil04sum.pdf
Nicko2,
Agreed!
Haliburton sees strong growth in Europe and Asia? Two massive markets that have committed to wing the internal combustion engine of the face of the Earth ASAP?