Big Three OFS Firms Calling Bottom on Industry Slump

Sentiments are clearly improving amongst the hard-hit oilfield service companies who all saw revenue grow in the fourth quarter of last year.

Drilling rig at sunset in Basra
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The new year has brought a noticeable dose of optimism to the world’s three biggest oilfield service companies who all suffered major losses last year when crude prices fell as a global pandemic unfolded.

In their quarterly calls earlier this month, the leaders of Halliburton, Schlumberger, and Baker Hughes told investors that the oil industry is likely at or nearing the bottom, and that a modest market recovery is set to begin.

Halliburton’s revenue in the fourth quarter was more than $3.2 billion, up about 8% from the previous quarter.

Schlumberger saw an increase in quarter-to-quarter revenue by 5% to $5.5 billion. Baker Hughes also earned $5.5 billion in revenue during the quarter, marking a 9% jump from the last reporting period.

While revenue and margins are improving for the oilfield service sector, it is not just because of a market upswing. The gains come after large cost-cutting programs that involved the divestment of entire business units along with the layoffs of tens of thousands of employees around the world.

Market Balance Coming

Schlumberger CEO Olivier Le Peuch spoke of entering a "new growth cycle" and said growth was seen in all of the company's operating regions during his investor call last week.

Le Peuch, who took Schlumberger's top position in 2019, has steered the company through what is the steepest decline in revenue on a percentage basis among the big three service companies. The firm's annual revenue in 2020 was $23.6 billion, a 28% drop year-over-year.

Le Peuch said he sees global oil demand returning to 2019 levels by 2023, in which case, Schlumberger may look to expand its budget to capture international markets.

Halliburton CEO Jeff Miller meanwhile predicted that a return to pre-pandemic demand could come as soon as 2022. Halliburton’s total revenue in 2020 of $14.4 billion was down from $22 billion the prior year.

Calling last year the “worst in our history,” Miller also highlighted the importance of the vaccines and said that the ongoing rebalancing of supply and demand has set the stage for a multiyear up cycle which Halliburton expects to begin after this quarter.

“Oil prices are back to pre-pandemic levels driven by global vaccine distribution and unfolding demand recovery, OPEC+ discipline, and a declining production base,” said Miller, noting the big caveat to his outlook is of course how the pandemic is resolved. He said, “Some caution is appropriate due to the surge in COVID-19 infections globally and the expected gradual return of spare production capacity.”

In addition to improving crude prices, Halliburton’s US onshore business is earning better profits while many shale producers focus on activating their inventory of thousands of DUCs, or drilled-but-uncompleted wells.

As demand for pressure pumping ticks up, Miller said competitors are cannibalizing idle units for parts, which may make it hard for them to add capacity in the future. He added that Halliburton will be well positioned for a tighter market and can fill any supply gaps without incremental capital thanks to the company’s maintenance strategy and recent efficiency gains from its in-house technology.

Baker Hughes CEO Lorenzo Simonelli echoed the sentiments of his rival peers in saying that the firm is “cautiously optimistic” that the global economy is on the mend. That factor combined with the rollout of COVID-19 vaccines has the company looking for demand growth over the next 12 to 18 months.

Baker Hughes posted a total-year revenue of $20.7 billion, down 13% from 2019.

Schlumberger, which has been shifting its business away from the North American market, sees that as global demand for oil returns, it will bring about a new supply picture in which US producers are more constrained than in years past.

Le Peuch said while he expects US onshore activity to get off to a “strong start” this year, it may not be sustainable. He explained to investors that “US production will still be visibly below previous production levels, as continued capital discipline and the impacts of consolidation will cap the spending level, and rate of growth may slow in the second half due to budget exhaustion.”

Schlumberger’s chief pointed out that US production has fallen by 2 million B/D during the pandemic, and as demand improves, he surmised that those barrels are likely to be put back onto the market not by US shale producers but by other countries.

The early signs of this trend are already showing themselves as the biggest gains Schlumberger saw last quarter came from its Middle East & Asia and offshore divisions. The company reported that the biggest revenue increases came from China.

Schlumberger’s confidence in the international market comes after it divested from its North American hydraulic fracturing business by selling a majority stake of it to Liberty Oilfield Services in a deal that closed earlier this month. Le Peuch said revenue growth in its North American well construction and production system businesses have already outpaced inflow from pressure pumping.

Baker Hughes is also keeping its eye on the LNG market, which has been ailing from low demand until recent cold snaps in Europe and Asia shot global prices back up. Simonelli said demand growth in China and coal-to-gas switching in several other countries have also helped buoy LNG prices over the past several months.

“We believe this resiliency highlights the structural demand growth for LNG and reaffirms our positive long-term view for natural gas as a transition and destination fuel for broader energy consumption,” he said, adding that three to four new LNG projects are expected to be greenlighted this year.

In addition to an increase in LNG equipment sales seen last quarter, Baker Hughes said it also benefited from service contracts for LNG facilities that helped cushion its bottom line from the otherwise punishing down cycle.

Low-Carbon Tech A High Priority

For all three major service companies, new technologies will play a pivotal role in their emergence from the ongoing downturn. A common thread among them is a growing focus on low-carbon product lines.

Schlumberger is planning to step up its investments in the energy transition after launching a low-carbon venture arm last year. The portfolio includes companies developing solutions for hydrogen, carbon capture, and geothermal energy.

Schlumberger is anticipating that these three areas in particular will become a major source of revenue by 2030. Earlier this month, the company debuted its newest venture, Genvia, which seeks to develop industrial-scale electrolyzers for hydrogen production.

Executives at Baker Hughes said “meaningful revenue” from the company’s carbon-capture business is just a few years away.

In November, Baker Hughes purchased a startup called Compact Carbon Capture which has developed a low-capital approach to carbon capture. The company said it will continue to look for investments in low-carbon technologies and is in the market for other acquisitions.

Halliburton recently joined the e-frac trend, or electric-powered fracturing, with pressure pumping units that can run off electricity provided by a local power grid. In addition to having a low-carbon footprint, Halliburton says the grid approach requires less capital than turbine-powered fleets.

But with only one deployment of this technology underway in Texas, it counts more as a first step than a full-blown commitment to the e-frac technology. Miller told investors that “when demand for emission-reduction solutions translates to better pricing” the company will investment more in e-frac units to replace conventional units as they are retired on a normal equipment schedule.