Weak demand, falling prices signal new troubles for oilfield services

Abraxas Petroleum

20/12/2018 16:28

By Liz Hampton
    HOUSTON, Dec 20 (Reuters) - The recent drop in U.S. oil
prices to around $46 a barrel and insufficient demand are
throwing into doubt the prospects for oilfield service companies
in 2019 and may portend a wave of restructuring and
consolidation of an industry still recovering from the 2014
downturn in energy markets.     
    Despite record U.S. oil production and exports, producers
are reducing their spending and learning to do jobs with fewer
crews. There has not been the wholesale staff cutbacks such as
the ones that occurred three years ago, but investors and
analysts expect consolidation in the services sector as work
dwindles and share prices fall. 
    Even service companies that have strong businesses have been
unable to get contract prices back to pre-crash levels. At
onshore driller Scandrill Inc, all of its 15 rigs are active in
U.S. oilfields. When two clients decided to stop drilling, new
customers picked up the slack.
    However, the rates that Scandrill charges for its rigs are
below where they were at the depths of the 2014 oil price crash,
said President Paul Mosvold. 
    "We won't see an increase in daily operating margin or the
daily rig contracting rate soon," he said in a phone interview
this month. 
    Some oil producers have cut services work. Diamondback
Energy  FANG.N  this month released two of its 10 hydraulic
fracturing crews and next year plans to operate between 18 and
22 drilling rigs, down from 24 rigs at work earlier this month. 
    Oilfield services company investors are cutting their
holdings. The Philadelphia SE Oil Service Index  .OSX , which
tracks some of the largest oilfield service companies, this week
fell below 81, the lowest since 2003 and below where it traded
when oil prices crashed to near $26 a barrel in 2016.
    With oil prices at their lowest level in over a year, the
services sector should brace for a wave of restructurings and
consolidation, analysts and attorneys told Reuters in
interviews.  
    "The oilfield sector has the largest group of struggling
companies within the energy industry. I think these companies
need to consolidate, no matter what,” said Sean Wheeler, a
mergers and acquisition attorney at law firm Kirkland & Ellis.
    Wheeler has been fielding inquiries from service providers
wanting to evaluate options for restructuring if prices do not
recover. 
    Contract driller Parker Drilling  PKDSQ.PK  in December
filed for pre-arranged bankruptcy after failing to earn an
annual profit since 2014, when oil prices started a long
decline. 
    One problem is the number of companies operating in the
market, attorneys and analysts said. Competition for fewer jobs
is making it hard for service companies to raise prices -
something that is benefiting shale producers.  
    “The availability of frac crews is great for us,” said Bob
Watson, chief executive of Abraxas Petroleum Corp  AXAS.O .
    Watson said he was shocked recently when Abraxas received 15
bids for a one-well frack job in the Permian Basin of West Texas
and New Mexico. 
    “We got a very good price," he said. "Things are slowing
down on the completions side.”
    The weaker outlook is pressuring shares of top oilfield
firms. Schlumberger NV  SLB.N  and Halliburton Co  HAL.N  are
trading below levels seen during the last oil-price downturn,
and Weatherford International Plc  WFT.N  recently warned
investors its shares could be delisted from the New York Stock
Exchange if it can not lift its stock price above $1.  
    "There is a significant number of companies with liquidity
and debt maturity issues," said Sajjad Alam, an analyst with
debt ratings firm Moody's Investors Service. 

 (Reporting by Liz Hampton; Additional reporting by Jennifer
Hiller; Editing by Steve Orlofsky)
 ((Liz.Hampton@thomsonreuters.com; +1 713 210 8522; Reuters
Messaging: Reuters Messaging: liz.hampton.reuters@reuters.net))