Home' Trinidad and Tobago Guardian : January 26th 2017 Contents BG8 | ENERGY
BUSINESS GUARDIAN guardian.co.tt JANUARY 26 • 2017
struggle may persist
Despite oil prices nes-
tled in the $50s for the
last few weeks, it's not
enough to stop the
cratering of the oil-
field services sector
this year, some analysts forecast.
Lingering weakness in customer
demand, overcapacity and a high net
burden continue to punish the oilfield
service (OFS) sector. Consequently, OFS
will lag behind their upstream clients by
at least one year, according to a Moody's
Investors Service research.
Despite an increase in the rig count,
it remains 65 per cent lower than late
2014, said Sajjad Alam, assistant vice
president for corporate finance at
Moody's. That won't be enough to re-
suscitate the sector.
"'Weak customer demand' is rela-
tive," Alam said. "Everything was under
20 feet of water, and although things are
under five or 10 feet underwater now,
they are still under water."
The length of the downturn -- by some
accounts, now in its third year -- took a
toll throughout the industry.
"Perhaps nobody could have predict-
ed the severity of the most recent down
cycle in terms of its depth and duration,
as depressed commodity prices an im-
promptu overhaul of the entire (oil and
gas) market," said James West, senior
managing director for oilfield services,
equipment and drilling, at Evercore ISI.
The result? A "profoundly deleterious
impact" to oilfield services, equipment
and drilling companies, he explained.
But where Moody's expects another
tough year for OFS, West and others are
painting a rosier picture.
Analysts at Evercore project glob-
al exploration and production (E&P)
capital spending (CAPEX) this year
will increase by two per cent, provid-
ing an assist to OFS. And at Barclays,
the ratings service is predicting global
CAPEX of seven per cent and investor
sentiment favoring the troubled sector.
"We believe 2017 will mark the first
year of a robust and sustained upcycle
for the oilfield service space as domes-
tic constraints to production limit US
growth and the decline takes its toll
internationally," analysts at Evercore
said at the end of 2016.
Equipment and proppant delays
on the OFS side will neutralise North
America's idle capacity, shifting eco-
nomic rent firmly back to service com-
panies after almost five years with no
pricing power, Barclays said.
This trend will be evident in the rig
count, the analysts said. The investment
bank now forecasts an average of about
730 rigs in 2017, approaching 875 rigs
by year-end. That's based on oil prices
of US$50 per barrel.
But Moody's said that although ser-
vice companies' margins will be up in
the fourth quarter 2016 when the rig
count began its ascent, at US$50 oil,
they will only be growing to a break-
In short, the decline from oil above
US$100 per barrel plunging to US$26
Alam pointed to heavyweight OFS
provider National Oilwell Varco, which
generated US$4.5 billion in earnings
before interest, taxes, depreciation
and amortisation (EBITDA) in 2014.
But in 2016, that figure will be closer
to US$300 million.
"The extent of drop---even for an
industry leader---has been so dramat-
ic that even if NOV were to triple its
EBITDA from 2016 levels, it's still go-
ing to be about one-fifth what it was
in 2014," Alam said.
NOV managed to pay down some
debt during the downturn, but for the
majority of OFS companies, that hasn't
been an option. During the 'lower for
longer' cycle, many feared spending
their liquidity would make them es-
pecially vulnerable to default.
Debt and default
Companies with high quality assets or
those that the market views as survivors
will be able to attract cash, Alam said.
Those saddled with significant debt will
continue to struggle to meet more debt
maturities with less cash. A smaller
company with a lower credit rating or
negative EBITDA will need to renegoti-
ate revolver credit that's due during the
next three years, a daunting challenge.
"It'll be almost impossible for these
(companies) to find someone to give
them money," Alam said. "The only
hope for them is if the oil price recovers
between now and their debt maturities."
A lag between ordering OFS equip-
ment and then putting it to work for
profit exists for the sector. If volatile
oil prices decline sharply, they are left
with expensive, idled equipment and
excess workforce. That time differential
can be one year for onshore drilling and
closer to two years for offshore projects,
"Oil price drops in a heartbeat and
E&P companies quickly shut down their
spending. All of a sudden the demand
is gone and you're stuck with a lot of
debt," he said.
Speculation capital flooded oil and
gas in the early shale days chasing re-
turns and great expectations. Service
companies suited up staff for the field
and bought equipment using debt; and
very little equity. As a result, their debt
levels grew based on the expectation
of more demand to come. When the
price collapsed, the companies were
left strapped for cash.
OFS valuations are based largely on
future cash flow, and equipment lacks
intrinsic value. And when oil prices
idle the equipment, the prospect of
cash dwindles. Today these compa-
nies---especially those offshore---are
worth a fraction of what they could
command in 2014.
"Now it's almost impossible for some
of the smaller companies to pay down
that debt or do something with it," he
State of the sector:
said. "We expect a lot of continued
default and this sector will have
the most defaults."
But where some companies were
killed off by the brutality of the
downturn, those that remain have
grown nimble and stronger.
"The downturn threatened to
destroy the industry, and for some,
it destroyed their business," said
"But destruction breeds cre-
ation and the oilfield service,
equipment and drilling industry
has ushered in a once-in-a-life-
time change in the way it conducts
business, interacts with custom-
ers, drives innovation engages in
(mergers and acquisitions), and
morphs into new businesses better
positioned for the always inevita-
The sector saviour
The key, it would seem, to res-
cuing OFS from the ravages of the
downturn, is oil price growth.
"When we talk to service com-
panies, they say there are some
things that are within their con-
trol and a lot of it is not within
their control. They're trying to do
things that are within their control
like cost management, rational-
ising their operations and more
efficiently managing the capital
structure, but ultimately, it's oil
price that dictates the fate of these
companies," Alam said.
With an appreciable increase
in oil prices, upstream companies
won't spend money for OFS com-
panies to help them get hydrocar-
bons out of the ground. In North
America, E&P companies have a
breakeven price of at least US$50
per barrel. To grow production
enough to call it a recovery, pric-
es need to meet or exceed US$60
per barrel, Alam said.
Prices have increased since
OPEC and non-OPEC countries
agreed to cut their production,
but it's remained unpredictable.
The Partners of J.D.Sellier+Co.
are pleased to announce that
William David Clarke
effective January 1, 2017
on December 31, 2016
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