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The Biggest Losers In The Shale Slowdown
The Biggest Losers In The Shale Slowdown
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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Schlumberger’s Terrifying Moment Of Truth About The US Energy Sector
Schlumberger’s Terrifying Moment Of Truth About The US Energy Sector
For many of our customers, available cash and annual budgets were exhausted well before the halfway point for the fourth quarter… as pricing levels for frackers has dropped into unsustainable territory.
Kibsgaard started by explaining why his firm has unveiled the massive layoffs and cost cuts:
we have faced the most severe industry downturn in 30 years
Then explained that this situation is unsustainable for American frackers…
On land in both the U.S. and Canada, the weakening activity resulted in additional commercial pressure for all product lines, and in particular in pressure pumping, where pricing levels dropped further into unsustainable territory for both operating margins and cash flow.
Which means, the pain has already started…
The burgeoning market conditions added to the pressure to the deep financial crisis throughout the oil and gas value chain and prompted operators to make further cuts to the already low EMP investment levels.For many of our customers, available cash and annual budgets were exhausted well before the halfway point for the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate, and where the traditional year-end product and multi-client site mix sales were largely muted.
While not ready to call a bottom in the oil market for this year, Kibsgaard said he didn’t think 2017 would be worse… but then again he said that at the start of 2015 too?
Still who cares the stock price is higher… which is all that matters…
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The Dismal Thing Schlumberger CEO Just Said about US Oil
The Dismal Thing Schlumberger CEO Just Said about US Oil
2016 to be brutal. Then, dreams of “potential spike in oil prices”
An engineer in the oil industry, who’d sold his house in Houston and bailed out after finding work in another state, just told me this:
A young civil engineer that I am working with is looking for more permanent, stable work. He talked with a head hunter today. The head hunter suggested that the young engineer stay where he is. He said he had 30,000 resumes in his database of engineers who were looking for work right now. Just amazing. I don’t know how many engineers there are in Houston. 200,000? 300,000?
I then called a friend of mine who works for Jacobs. Well, he no longer works there. He was laid off. A very seasoned engineer. He said he was glad I left Houston and that things were looking grim. Fluor and Technip had also laid off a lot of engineers. He said he heard that Fluor, which goes after megaprojects, had laid off 30 Process Engineers – which is what I am.
This is a bad indication. We are the first line of engineers on a project. Then, as the project moves forward, instrument, estimating, electrical, and structural engineers are brought on. If process engineers (chemical engineers) aren’t being used, that means there are fewer projects coming up to keep them busy.
So what happened to the hopes for a recovery?
Three months ago, Paal Kibsgaard, CEO of oil-field services giant Schlumberger, figured the oil industry in the US had bottomed out. But on Friday during the earnings call, he changed his tune.
The business environment “clearly got worsened in the third quarter,” he said. It’s going to get even worse in the US in the fourth quarter. And 2016 is going to be very tough. He doesn’t see a recovery until 2017.
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More Job Losses Coming to U.S. Shale
More Job Losses Coming to U.S. Shale
With the recently concluded nuclear deal between Iran and the P5+1 countries, oil prices have already started heading downward on sentiments that Iran’s crude oil supply would further contribute to the already rising global supply glut. The economic crisis in Greece, OPEC’s high production levels and China’s market turmoil have created more pressure on oil prices, making a price rebound look highly unlikely in the near future.
So, with the prices of both Brent and WTI moving towards $50 per barrel, the short to medium-term outlook for oil remains mostly bearish. This is bad news for the U.S. shale sector which is already dealing with rising debt and the ever-increasing risk of default.
A recent Bloomberg report stated that U.S. driller’s debts stood at $235 billion at the end of first quarter of 2015, which is quite worrying. Does this mean that the U.S. oil sector is likely to witness a lot more layoffs than we have seen so far? Surprisingly, a recent IHS study had revealed that the U.S. shale sector has been boosting job creation in addition to supporting around 1.7 million jobs in U.S.
All this as the overall unemployment rate in U.S. has been declining since previous years. But with rising negative sentiment pertaining to oil prices, is U.S. the shale sector prepared to face one of its biggest tests yet? Will the industry be able to sustain another long period of low oil prices or will it once again resort to trimming its workforce?
Related: Shale Industry May Need A Complete Rethink To Survive
Low oil prices will most likely result in more job losses
Since the oil price collapse of last year, we have seen how oil field services and drilling companies have slashed thousands of jobs in order to reduce costs and cut their operational spending. Some of the major oilfield companies like Schlumberger, Halliburton and Weatherford have already announced close to 20,000 layoffs as of February 2015.
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