Swings & Roustabouts Ep. 3: Oilfield Services: Where are we now? An analysis of Q2 earnings calls

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In the first installment of our Swings & Roustabouts series, we looked at the history of price cycles and instability in the oil and gas market. While that gives some context to how the industry operates, it is important to understand what the market looks like now. The majority of companies within the industry recently released their Q2 earnings report, in which they report their financial and operational results, share their forecasts and discuss their current strategies. We took a look at these reports to see where companies within the industry currently find themselves and what their strategies look like going forward.

Previously, we discussed 7 strategies for oilfield service companies to survive a downturn and thrive in a recovery, highlighting initiatives that companies in the industry are employing. This analysis looks at whether companies are still looking to these strategies, based on the condition of the market at Q2 2019, and whether they are implementing initiatives outside of these seven. We also looked at whether there are trends in forecasts for the remainder of the year.

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Companies Surveyed

We looked at 10 companies within the oilfield service industry operating in North America. This included companies deemed as large (revenue in excess of $1 billion in Q2), medium (revenue between $400 million and $1 billion in Q2) and small (revenue below $400 million in Q2). The sample also included companies that operate on a global scale and those that focus specifically on North America. The analysis turned up numerous common threads within their strategies. The most common strategies and forecasts cited by the 10 companies are discussed below.

Cost-Cutting and Operational Efficiency

A recurring theme for all the companies surveyed is the need to control costs and increase operational efficiencies. One company referred to the industry being in a “generational downturn” in reference to the market taking so long to recover from the 2014 crash. Operators and owners are are being conservative when it comes to spending, and this is forcing service companies to lower costs. The majority of the companies referred to the US land market as being a more competitive pricing environment, forcing these strict cost-control measures. Labor cuts have been implemented by most of the companies. This ranges from on-site laborers to executives being let go to reduce cost. One company referred to this as “right-sizing” their operations.

While headcount reduction is a common theme, some companies have gone further, closing down or divesting whole operating lines and regions. Four companies closed whole operating lines or ceased operations in an underperforming region during Q2 2019 as a cost reduction measure. Almost all the companies analyzed also planned to reduce their CAPEX budget for the remainder of 2019 — one went so far as to halve its CAPEX budget.

The final cost-cutting measure being implemented is the efficiency of asset utilization. Equipment being underutilized or not being used at all was either sold or idled by a number of companies. These reduced fleet sizes allow for the streamlining of operations and the elimination of costs associated with underutilized assets.

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Focus on International and Offshore Operations

All the companies that have offshore operations reported better returns for that sector than for onshore. The offshore environment appears to be more resilient in terms of weathering the volatility of the market. Offshore projects tend to include longer-term service contracts which reduces risk and guarantees income for the oilfield service company. There seems to be a consensus that unconventional plays within the US land market are maturing, and companies are investing more into the offshore market.

The companies that have international operations also reported better returns for this sector than for their North American operations. Returns in regions such as the Middle East, Russia and Europe outperformed those in North America. This is caused by multiple factors, notably the maturing of some US plays and increased competition in the US market. All the companies with international operations plan to invest more into international operations and decrease CAPEX in the US market.

Mergers and Acquisitions

Some companies used Q2 to expand their market offerings through acquisitions or by merging with competitors. One company has initiated a merger of equals with a competitor, which would increase their geographical footprint, their revenue and market share. Companies use downturns to merge with competitors as a way to gain a competitive advantage and to ensure survival.

A number of companies also acquired businesses to expand their service offerings. This included the acquisition of a small niche company to add to the product line of the buyer, as well as numerous acquisitions to expand technology capabilities. With the US market becoming increasingly competitive, technology adoption has become imperative for companies to survive. Some companies have attempted to develop technology in-house, while others have acquired companies that provide the needed technology.

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The Implementation of Technology

Along with strict spending discipline, the strategy most cited by the 10 companies analyzed was the implementation of technology. Large and small companies mentioned that the implementation of technology to increase operational efficiency is core to their strategy moving forward. One of the large companies mentioned that they are “ready for broad digital implementation” while a medium-sized company said that they are “focused on driving technology innovation”. The type of technology being implemented ranged from equipment automation and digital sensors to business intelligence platforms and business process automation.

The majority of companies analyzed cited technology implementation as a way to gain a competitive advantage in the market and survive the moderate short-term outlook. With cost-cutting being the focus of almost every oilfield service company, anything that can offset the decrease in labor and resources is welcomed. Technology allows these companies to do more with less. JourneyApps works with oilfield service companies to digitize manual business processes, leading to cost savings and increased operational efficiencies.

The Forecast

Optimism about the short-term forecast for the market varies by company size. Larger companies believe that the market will remain stable with moderate improvement. This is driven by their ability to hedge against the US land market with international and offshore operations while also being involved with a larger portion of the value chain. Some companies are also using their resources to venture outside of the oil space, with one company selling equipment to an offshore wind turbine construction company in Europe.

Small and medium-sized companies expect the remainder of 2019 to pose challenges in terms of increasing profits and gaining market share within North America. These companies will need to implement stricter cost-cutting measures to stay competitive and thrive within this stagnant market.

Conclusion

There are numerous common themes throughout the strategies that oilfield service companies are currently employing to stay competitive within the market. Cost control and technology implementation is the focus of virtually every company analyzed, with the stagnant market forcing companies to focus on operational and fiscal efficiency. With a moderate outlook for 2019, oilfield service companies need to be proactive to ensure they remain competitive. The next installments in our Swings & Roustabouts series will look at where the industry is headed, and what will be needed to thrive in 2020.


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