The global oilfield services and drilling (OFS) industry continues to endure a severe downturn as depressed energy prices prolongs reduced spending by exploration and production (E&P) companies, Moody's Investors Service noted in a new report. As credit conditions deteriorate further, defaults are set to increase.
The rating agency's outlook for the global oilfield services and drilling industry continues to be negative.
Moody's expects the combination of volatile energy prices and suppressed E&P spending will drive OFS industry EBITDA lower by 30%-40% in 2016 and stall any chance of a recovery until at least late 2017. Moreover, even if oil prices rebound modestly in 2016, OFS recovery will lag, given the industry’s overcapacity and the gradual increase in drilling activity.
"The OFS industry is facing the worst downturn since the early 1980s after an unprecedented drop in global oil and North American natural gas prices," noted Moody's AVP-Analyst Sajjad Alam. "Drilling activity has plummeted in most oil producing regions, curbing demand for oilfield support services."
In April, global land drilling hit a 17-year low, following a decline every month since November 2014, except for a three-month respite in mid-2015. Additionally, US rig activity has decreased to its lowest point in 40 years, according to Baker Hughes rig data.
"We expect the US rig count to set a cyclical bottom in 2016 and then inch up in 2017 as oil markets narrow the supply/demand gap," said Alam.
As OFS companies face tighter liquidity conditions in 2016-17 amid declining cash flows, depressed asset values, and limited revolver and market access, Moody's expects a number of OFS companies rated B3 or lower will not survive the protracted downturn without restructuring their debt.