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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