DW: Oilfield services in holding pattern as E&P searches for equilibrium

Douglas-Westwood’s DW Monday report for May 11, comments on how the current industry economic climate is testing the leaders of oilfield services companies.

The report notes that, when oil prices dramatically dropped in the fall of 2014, operators began to significantly alter their plans. As months passed, many thought service providers would gain clarity on the upstream situation and begin to develop their own strategic plans. However, as the industry has progressed toward mid-2015 and answers have been obtained, many new questions have arisen.

ConocoPhillips CEO Ryan Lance said many producers were trading at valuations that still reflected a price closer to US$80 per barrel, while private equity executives have mentioned to DW that many bid-ask spreads are too wide on transactions for exploration and production (E&P) producers, particularly US unconventional shale players.

This is inhibiting some of the necessary revaluation and consolidation that will lead to a more normalized market environment. So oilfield service providers remain in limbo and investors struggle to mark them to market. Until management of service companies can assess market pricing, future activity levels and an understanding of which of their customers are going to be active, short-term strategic plans remain fluid and long-term strategies remain in jeopardy.

So how have service companies and manufacturers managed the situation? Schlumberger, for instance, has been very proactive, and has cut jobs and capital spending relative to projected activity declines. Others are betting on a stronger and quicker recovery; they have less aggressively cut, and hope to be well positioned for a market resurgence – which could lead toward greater cuts if the environment doesn’t rebound accordingly.

Strategic planning is crucially important to the investor community and will be scrutinized in critical moments. It will also be an indicator for how in-touch leaders of oilfield service providers are with their businesses. It will be nearly impossible for managers to make unanimously popular decisions, but they will be expected to make the right ones. The DW Monday report concludes that time will tell on what companies managed the uncertainty most appropriately.


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