Climbing losses force two large oil rig operators and frackers to consider pulling out of North American market.
Schlumberger reported losses for the first time in North America since the turn of the century and is now evaluating whether it’s worth a temporary business halt. Baker Hughes Inc. has decided to limit exposure to costly work in the region because of “unsustainable pricing.”
According to Bloomberg Intelligence, it’s the first time in 10 years that all big 3 in oil services (including Halliburton) reported first-quarter losses in the region.
“Activity is coming down to basically critical-mass type of levels,” explains Schlumberger Chairman and C.E.O. Paal Kibsgaard. “What’s the benefit of taking the losses versus shutting down and then making the investments later on to start back up again?” Even FMC Technologies Inc., the largest provider of subsea equipment, said lost work was surprising.
It’s no surprise oil service and equipment companies felt devastating effects of dropping crude prices, contributing to 250,000 job cuts (the largest in the downturn). “It’s a pretty dire situation right now in the oil services market,” says J. David Anderson, an analyst at Barclays in New York. “The next step here is literally shutting down operations.”
Unsustainable business is a common refrain among providers after first-quarter results were shared. “We’ve been hearing one version or another of that word for some time now, and I think a lot of people just dismissed it,” Barclays’ Anderson said. “Companies are forced to take these losses right now. Otherwise, when this eventual recovery happens, they’re not going to be able to respond. That’s what they have to weigh.”
President Jeff Miller of Halliburton describes an operating loss margin of 2.2 percent. “My definition of an unsustainable market is one where all service companies are losing money in North America, which is where we are now.”
The market here for hydraulic fracturing is considered a proxy for oilfield service activity; producers in the shale plays use the technique to produce crude.
According to consultant Caldwell Bailey of IHS Inc, more than half of U.S. fracking equipment goes unused. Prices for such services have plummeted as much as 40 percent since the downtown began. “They can’t cut costs anymore,” Anderson said. “You’re at the muscle and the bone. If I cut from here, I’m impairing myself on the upside.”
Article written by HEI contributor Marcela Abarca.