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The Biggest Losers In The Shale Slowdown

The Biggest Losers In The Shale Slowdown

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Schlumberger saw its debt rating downgraded by S&P due to the unfolding slowdown in drilling by U.S. shale companies.

The largest oilfield service company in the world has seen its earnings hit as the shale industry goes through a soft patch. S&P cut Schlumberger’s debt rating to A+, down from AA-. Meanwhile, Halliburton saw its outlook downgraded from “stable” to “negative.”

“Oilfield services companies will no longer be able to generate the high operating margins they did in 2014,” Carin Dehne-Kiley, an analyst at S&P, wrote in a report. “The oilfield services industry has fundamentally changed due to permanent efficiency and productivity gains realized by E&P companies as well as investor sentiment calling for E&P companies to live within cash flow and limit production growth.”

The sharp fall in oil prices late last year, which stretched into the first quarter of 2019, led to a rapid erosion in the U.S. rig count. The oil rig count fell by 5 to 797 for the week ending on May 24. The rebound in oil prices this year has not led to a corresponding bounce back in the rig count.

Shale companies have pulled back, making modest spending cuts amid the soft patch. Moreover, the U.S-China trade war may have killed off yet another rally, with gloom spreadingacross the industry. Another lengthy downturn would likely deepen the modest austerity measures implemented by shale producers, which would further weigh down the oilfield services sector.

Lower drilling activity translates into less interest in the variety of services that Schlumberger offers. A depressed market for equipment, labor and other services means that companies like Schlumberger have less leverage in pricing negotiations with oil producers. Several years on from the massive oil market bust in 2014, Schlumberger has been trying to claw back the steep discounts it was forced to offer to producers. 

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