, Oilfield Service Firms Still Waiting To See Benefits Of Higher Prices, The Nzuchi News Forbes

Oilfield Service Firms Still Waiting To See Benefits Of Higher Prices

, Oilfield Service Firms Still Waiting To See Benefits Of Higher Prices, The Nzuchi News Forbes

It’s happy days again for the U.S. oil industry with benchmark West Texas Intermediate (WTI) prices trading over $70 a barrel and domestic producers on pace to post record free cash flow this year.

That’s a remarkable turnaround from the dark days of 2020 when the pandemic prompted WTI to temporarily trade in negative territory, ushering in the most profound downturn in the oil industry’s history. 

But the good times have not extended to all corners of the industry. While producers will generate some $30 billion in free cash flow this year, the oil services contractors that provide them with rigs, drilling equipment, fracking materials, and the help they need extracting oil and gas are still struggling. This is particularly true for service contractors that assist the onshore shale sector in the Lower 48 states, including my company Canary, LLC.

How can this be when the U.S. oil and gas rig count has nearly doubled from its pandemic trough of 244 last August to 470 today? There are a number of reasons, but for starters that 470 pales compared to the nearly 800 rigs that were in operation before the pandemic struck in early 2020.  

The fact is that producers are still investing at pandemic levels today even though WTI has surged past $70 and could test $100 in the future, according to top executives from the world’s largest oil trading companies.

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This explains why producers are swimming in free cash flow: they are reaping fat revenues from strong oil prices while keeping capital spending low. Producers have to do this to get back in the good graces of investors, who grew tired of the shale sector’s previous debt-fueled business model that saw it wildly outspend its cash flow to chase growth. 

But those days are over, and they aren’t coming back. 

In the first quarter, 39 publicly-traded producers reinvested just 57%, or $8.9 billion, of the $15.5 billion in cash flow they generated, according to data compiled by RBN Energy. That’s down substantially from the 84% reinvestment rate seen in 2020 and a far cry from shale’s pre-pandemic boom years when producers needed to tap debt markets to fund their aggressive drilling programs. 

, Oilfield Service Firms Still Waiting To See Benefits Of Higher Prices, The Nzuchi News Forbes

Producers are now doing more with less. Despite sharp capex cuts, they have managed to boost U.S. oil production to around 11 million barrels per day from 10 million barrels a day at its pandemic low point in May 2020, according to the Energy Information Administration (EIA). So long as WTI holds above $60, the EIA expects production to average 11.1 million barrels a day this year and 11.8 million barrels a day in 2022, exiting next year around 12 million barrels a day. 

If oil prices continue to blaze, there’s a real chance that producers will be able to satisfy investors and accelerate their growth plans — adding more rigs — particularly as OPEC-plus spare capacity dwindles over the next 18 months. 

But oil services contractors can’t count on this to save them. The low-carbon energy transition will continue to encourage investors to demand capital discipline from shale producers, and oil services firms must be ready. 

Looking at global upstream spending trends in coming years, Morgan Stanley is most bullish on the prospects for the shale sector, where it expects a compound annual growth rate of 8 percent in 2021-24. But even with those increases, shale capex would still be some 30% below the pre-pandemic level in 2019. 

To be sure, the outlook for oil services improves with every new rig that is added, and the second quarter could mark the low point for cash margins. Drilling and well completions activity and pricing are edging higher, especially for firms with specialized services or more productive equipment. Drilling companies are also seeking more skilled workers, and job offers for roughnecks are up, which is a strong sign. 

Oilfield jobs increased in May by 1.6%, or about 9,700 positions, according to the Energy Workforce & Technology Council, and some 27,000 oilfield jobs have been regained since February. 

But there’s still a long way to go, and the boom years for upstream capex won’t magically return — even if oil goes to $100. Investors and policymakers, including the Biden administration, are focused on the energy transition and apparently willing to leave any future oil supply gaps to OPEC and Russia to fill. 

The oil services sector must prepare for this structural downward shift in upstream spending. It must get leaner, meaner and greener. 

That means more downsizing, cost-cutting, and consolidation to eliminate excess equipment capacity in the market, which will give services firms greater pricing power when negotiating contracts with producers. It means remaking corporate strategies with a focus on reducing greenhouse gas emissions — and thinking about how they can help their producer clients clean up their operations and prepare for the transition.

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