Oil prices weighing companies down, bankruptcies, service companies etc

ceo_energemsier · July 2, 2019

Drillers Fighting for New Life

(Bloomberg) -- For the oilfield services industry, it’s no longer about merely navigating a downturn. It’s now about survival.

Five years after crude began its plunge to less than 30$/bbl

from more than $100, the companies that drill and frack wells are living in a new world. The producers they work for have become increasingly efficient and cost-conscious, reacting to shareholder demands for payback and a crude market that’s recovered only part of that brutal decline.

Meanwhile, the service companies that handed out discounts in the downturn are barely holding on. Schlumberger Ltd. and Halliburton Co., the two biggest, have each fallen by more than 65% since crude started tumbling, and Weatherford International Plc on Monday filed for bankruptcy. Contrast that with the oil producers, collectively down less than 50%.

It’s a model that “definitely needs to be changed," said Luke Lemoine, an analyst at Capital One in New Orleans, in a phone interview. "It’s just been capital destruction for 20 years."

Oilfield service providers have a long history of riding the ups and downs in the energy market. They ramp up rigs, workers and prices when oil is more expensive, and cut back when the market drops.

Gear Pile-Up

When crude began recovering in March 2016, the servicers started refortifying. But with their customers keeping a lid on spending, the gear began to pile up. In February, Rystad Energy, an industry consultant, estimated that supplies of U.S. fracking gear -- the pumps that blast water, sand and chemicals underground to release crude in what has become the most expensive part of drilling -- will exceed demand by about 68% by year’s end.

At the same time, producers have enjoyed an output boom in recent years, doing more with less by using new methods and technology. Shortened horizontal drilling times and longer laterals that require fewer wells to be drilled are taking a toll on servicers.

In June 2014, the U.S. pumped 8.4 million barrels of crude using 1,545 drilling rigs. Last month, it produced about 12.2 million barrels, 45% more, with just 788 rigs.

"I have an industry that’s built for way more work than we are currently doing, or that we think will be done in the foreseeable future – or at least the next three or four years," said Richard Spears, an industry consultant who’s also worked in and around the oil patch for decades.

The gear glut is taking a toll as service companies are jockeying to defend their share of an increasingly lean market. The prices charged by service companies are at their lowest levels since September 2016, with more companies dropping prices than raising them, according to data from the Federal Reserve Bank of Dallas. The servicer price index hasn’t risen for at least a year, the bank’s quarterly surveys show.

While large companies such as Schlumberger and Halliburton are struggling, smaller companies are facing dire consequences. Weatherford, in filing for bankruptcy, is seeking protection at a time when its debt load has topped $8 billion. National Oilwell Varco Inc., meanwhile, is cutting expenses to the bone.

"A major value transfer is underway between oilfield service companies and E&P entities," James West, an analyst at Evercore ISI, wrote in a report earlier this year. "Rather than seek to preserve value, companies sought greater market positioning despite the structural predicament. Intense competitive conditions exist in almost every major oilfield service product line."

Over the last decade in particular, oil servicers went from a 13% lead over exploration and production companies when it comes to returns on capital employed, to a 7% deficit to the E&Ps last year, according to slides from Evercore ISI in February, when the bank called on service companies to take its pledge to generate returns for shareholders.

Earnings Drop

During the same period, the biggest oilfield service and equipment companies have spent $88 billion while earnings have dropped by $5.8 billion, and net debt has climbed by $24 billion, according to Evercore.

Companies are reacting to the crunch in different ways.

Schlumberger sold its land-rig unit in the Middle East and its global tool-rental business. Precision Drilling sold its Mexican operations. Keane Group Inc. and C&J Energy Services Inc. agreed to combine in a pact valued at about $746 million to become the third biggest frack provider.

A Schlumberger spokesman said the company wouldn’t discuss the industry outlook before it released second-quarter earnings this month. A Halliburton spokesman declined to comment, and Weatherford didn’t immediately respond to messages seeking comment.

Some analysts and investors, meanwhile, are seeking more widespread consolidation.

"The oilfield services industry has fundamentally changed," Carin Dehne-Kiley, an analyst at S&P, wrote in a report to investors. "Companies will no longer be able to generate the high operating margins they did in 2014."

Even a single company cutting back on its lesser-performing service lines would help, according to Evercore’s West. "You’re starting to see companies look at their portfolios and pruning in order to drive overall better corporate returns," he said.

Servicers need to focus more on digital technology, switching from diesel-powered frack equipment to electric and generally improving the quality of their gear, said Jud Bailey, an analyst at Wells Fargo. Doing so could lower costs by 25-35% over the next five years, he estimates.

The companies that are winning are the ones “doing one to three things extraordinarily well," Bailey said. "The ones who do 10 things -- and do one or two of them really well and the rest mediocre -- those are the ones who are struggling."

ceo_energemsier · July 2, 2019

Weatherford International plc, Ltd and LLC revealed Monday that they have initiated financial restructuring by commencing voluntary cases under chapter 11 of the U.S. Bankruptcy Code to “effectuate” a "pre-packaged plan of reorganization”.

Financial restructuring implemented through the pre-packaged chapter 11 process will reduce Weatherford’s long-term debt by more than $5.8 billion, according to Weatherford. The proposed restructuring contemplates $1.75 billion in new financing and up to $1.25 billion in additional post-emergence financing.

Weatherford’s other entities and affiliates are not included in the chapter 11 cases. Weatherford expects to file Bermuda and Irish examinership proceedings collectively with the chapter 11 cases in the coming months. Company operations are continuing without interruption and with no expected impact on customers, vendors, partners or employees, Weatherford revealed.

Back in May, Weatherford announced that it had executed a restructuring support agreement with a group of its senior noteholders that collectively held, or controlled, approximately 62 percent of the company's senior unsecured notes.

In its fourth quarter results statement released back in February, Weatherford reported a net loss of $2.1 billion. During the same period in 2017, the company reported a net loss of $1.9 billion. Weatherford has not yet released financial results for 2019.

In April, Weatherford completed the sale of its surface data logging business to Excellence Logging for $50 million. During the same month the company completed the sale of its laboratory services business to a group led by CSL Capital Managementfor $206 million in cash. The company also completed the sale of several rigs during February and March.

ceo_energemsier · July 2, 2019

Halliburton and Other Drillers Are Fighting for New Life in a World of Cheap Oil

image.png.94bbf7287e05af0a2d7962e544b1258b.png

(Bloomberg) -- For the oilfield services industry, it’s no longer about merely navigating a downturn. It’s now about survival.Five years after crude began its plunge to less than $30 a barrel from more than $100, the companies that drill and frack wells are living in a new world. The producers they work for have become increasingly efficient and cost-conscious, reacting to shareholder demands for payback and a crude market that’s recovered only part of that brutal decline.Meanwhile, the service companies that handed out discounts in the downturn are barely holding on. Schlumberger Ltd. and Halliburton Co., the two biggest, have each fallen by more than 65% since crude started tumbling, and Weatherford International Plc on Monday filed for bankruptcy. Contrast that with the oil producers, collectively down less than 50%.It’s a model that “definitely needs to be changed," said Luke Lemoine, an analyst at Capital One in New Orleans, in a phone interview. "It’s just been capital destruction for 20 years."Oilfield service providers have a long history of riding the ups and downs in the energy market. They ramp up rigs, workers and prices when oil is more expensive, and cut back when the market drops.Gear Pile-UpWhen crude began recovering in March 2016, the servicers started refortifying. But with their customers keeping a lid on spending, the gear began to pile up. In February, Rystad Energy, an industry consultant, estimated that supplies of U.S. fracking gear -- the pumps that blast water, sand and chemicals underground to release crude in what has become the most expensive part of drilling -- will exceed demand by about 68% by year’s end.At the same time, producers have enjoyed an output boom in recent years, doing more with less by using new methods and technology. Shortened horizontal drilling times and longer laterals that require fewer wells to be drilled are taking a toll on servicers.In June 2014, the U.S. pumped 8.4 million barrels of crude using 1,545 drilling rigs. Last month, it produced about 12.2 million barrels, 45% more, with just 788 rigs."I have an industry that’s built for way more work than we are currently doing, or that we think will be done in the foreseeable future – or at least the next three or four years," said Richard Spears, an industry consultant who’s also worked in and around the oil patch for decades.The gear glut is taking a toll as service companies are jockeying to defend their share of an increasingly lean market. The prices charged by service companies are at their lowest levels since September 2016, with more companies dropping prices than raising them, according to data from the Federal Reserve Bank of Dallas. The servicer price index hasn’t risen for at least a year, the bank’s quarterly surveys show.While large companies such as Schlumberger and Halliburton are struggling, smaller companies are facing dire consequences. Weatherford, in filing for bankruptcy, is seeking protection at a time when its debt load has topped $8 billion. National Oilwell Varco Inc., meanwhile, is cutting expenses to the bone."A major value transfer is underway between oilfield service companies and E&P entities," James West, an analyst at Evercore ISI, wrote in a report earlier this year. "Rather than seek to preserve value, companies sought greater market positioning despite the structural predicament. Intense competitive conditions exist in almost every major oilfield service product line."Over the last decade in particular, oil servicers went from a 13% lead over exploration and production companies when it comes to returns on capital employed, to a 7% deficit to the E&Ps last year, according to slides from Evercore ISI in February, when the bank called on service companies to take its pledge to generate returns for shareholders.Earnings DropDuring the same period, the biggest oilfield service and equipment companies have spent $88 billion while earnings have dropped by $5.8 billion, and net debt has climbed by $24 billion, according to Evercore.Companies are reacting to the crunch in different ways.Schlumberger sold its land-rig unit in the Middle East and its global tool-rental business. Precision Drilling sold its Mexican operations. Keane Group Inc. and C&J Energy Services Inc. agreed to combine in a pact valued at about $746 million to become the third biggest frack provider.A Schlumberger spokesman said the company wouldn’t discuss the industry outlook before it released second-quarter earnings this month. A Halliburton spokesman declined to comment, and Weatherford didn’t immediately respond to messages seeking comment.Some analysts and investors, meanwhile, are seeking more widespread consolidation."The oilfield services industry has fundamentally changed," Carin Dehne-Kiley, an analyst at S&P, wrote in a report to investors. "Companies will no longer be able to generate the high operating margins they did in 2014."Even a single company cutting back on its lesser-performing service lines would help, according to Evercore’s West. "You’re starting to see companies look at their portfolios and pruning in order to drive overall better corporate returns," he said.Servicers need to focus more on digital technology, switching from diesel-powered frack equipment to electric and generally improving the quality of their gear, said Jud Bailey, an analyst at Wells Fargo. Doing so could lower costs by 25-35% over the next five years, he estimates.The companies that are winning are the ones “doing one to three things extraordinarily well," Bailey said. "The ones who do 10 things -- and do one or two of them really well and the rest mediocre -- those are the ones who are struggling."(Second in a series looking at the oil industry five years after the price rout.)\--With assistance from Alex Nussbaum.To contact the reporter on this story: David Wethe in Houston at dwethe@bloomberg.netTo contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Reg Gale, Christine BuurmaFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- For the oilfield services industry, it’s no longer about merely navigating a downturn. It’s now about survival.

Five years after crude began its plunge to less than $30 a barrel from more than $100, the companies that drill and frack wells are living in a new world. The producers they work for have become increasingly efficient and cost-conscious, reacting to shareholder demands for payback and a crude market that’s recovered only part of that brutal decline.