How OFS Sees This Upcycle Playing Out
Second-quarter earnings for the three biggest oilfield service companies arrived with some new takes on where the market is headed.
Second-quarter earnings are in and it was a bit of a mixed bag for the oil and gas industry’s top service firms. Profits were up for Halliburton and Schlumberger, but high oil and gas prices were not enough to buoy Baker Hughes which marked a loss over the quarter. Here are some of the highlights these firms reported last week.
Schlumberger: Net income on an adjusted basis was $959 million. Revenue topped $6.8 billion, a 14% quarterly jump which is the largest sequential revenue increase seen in more than a decade. Year-over-year growth was 20%, and Schlumberger raised its full-year revenue forecast to $27 billion. The firm cited robust demand for exploration services and rising offshore activity as key drivers of its positive earnings.
Halliburton: Net income on an adjusted basis was $442 million as revenue increased 18% sequentially to $5.1 billion. Revenue from the completions and production unit reached $2.9 billion, up 24% from the first quarter. The drilling and evaluation unit saw quarterly revenue increase sequentially by 12% to $2.2 billion.
Baker Hughes: A net loss of $839 million was posted as revenue hit $5 billion, up 4% sequentially but down 2% from a year ago. The firm saw equipment orders drop 14% sequentially to $5.9 billion. Baker Hughes CEO Lorenzo Simonelli described the “mixed” result as a product of supply chain constraints and the winding down of its Russian business.
Beyond the top line figures shared, the chiefs of each global service firm offered fresh takes on what’s shaping the industry’s current upswing.
A Cycle Unlike Most Others
Jeff Miller, CEO of Halliburton, emphasized the uniqueness of the times in suggesting that tight supplies of oil and gas will not be met by a swift ramp up in global output. He cited OPEC’s lack of spare capacity, an “unsustainable” release of US strategic petroleum reserves, and the risks facing Russia's future production.
“In short, this cycle has been nothing like prior cycles,” said Miller. “This means any economic slowdown will not solve the structural oil undersupply problems.”
Going further, Miller said high oil and gas prices have sparked renewed spending but that it appears to be at a less aggressive pace than what was seen in past upcycles. He considers operators to be constrained by an undiminished need to show investors capital discipline, their plans to reduce emissions, and regulatory pressures.
In the US at least, even if producers were able to spend at a faster clip it would not solve for a tight supply of oilfield equipment to do the heavy lifting. As Miller explained, “Service companies invested for returns” during this year’s upswing but “did not overbuild.”
Some of this messaging was echoed by Olivier Le Peuch, CEO of Schlumberger, who pointed to recent OPEC and IEA outlooks that “suggest a call on supply from North America and a more significant call on supply from the international basins.”
Even in the event of a global economic slowdown, Le Peuch said this demand picture should not change much. He told investors that despite a choppy economic outlook, “the combination of energy security, favorable break-even prices, and the urgency to grow long-term oil and gas production capacity will continue to support strong upstream E&P spending growth.”
Le Peuch continued, “Consequently, we are witnessing a decoupling of upstream spending from near-term demand volatility, resulting in resilient global oil and gas activity growth in 2022 and beyond.”
Amid reporting a quarterly loss, executives at Baker Hughes were less upbeat in their comments to investors but nonetheless agree that conditions are lining up in support of high oil and gas prices.
On his earnings call, Simonelli said, “On one hand, the demand outlook for the next 12 to 18 months is deteriorating, as inflation erodes consumer purchasing power and central banks aggressively raise interest rates to combat inflation. On the other hand, due to years of underinvestment globally and the potential need to replace Russian barrels, broader supply constraints can realistically keep commodity prices at elevated levels, even in a scenario of moderate demand destruction.”
No Slack in US Frac
Halliburton is the largest provider of pressure pumping services in the US but it won’t be getting too much bigger in the near future. Miller pointed this out while noting that the sand supply issues that held back activity in the first quarter have resolved, which led to an uptick in US onshore completions during the second quarter.
However, Halliburton’s combined fleet of pumping units used for hydraulic fracturing is now booked for the rest of the year. “As for the overall market," added Miller, "I believe it will be all but sold out for the second half of the year due to service company discipline, long lead times for new fleets, and supply chain bottlenecks for consumables.”
Meanwhile, Schlumberger’s exposure to the red hot US completions market has become even smaller after the company sold off most of its stake in Liberty Oilfield Services.
In 2020, Schlumberger sold its North American completions business to Liberty for a 37% share of that company’s stock that at the time was valued at $448 million. That stake is now down to 12% after Schlumberger sold shares in Liberty for $429 million during the second quarter. That puts Schlumberger's total proceeds from stock sales of the service company at $513 million for the year.
Offshore and LNG Building Steam
Schlumberger’s chief told investors that “we are in the early innings” of a big offshore upcycle. Le Peuch said this boosted the company’s second-quarter earnings since on a project-level basis, offshore contracts typically generate five times the revenue of onshore contracts.
The strengthening in the global offshore market follows what he said were shifting sentiments by international and national oil companies on committing to more long-term projects. The positive turn was most felt in South America; operators in Colombia are stepping up exploration efforts as those in Brazil seek to grow that country’s base.
Schlumberger also saw an uptick in offshore activity in North America and is expecting other regions to follow suit. Le Peuch highlighted that Saudi Arabia is planning to invest in more shallow-water programs starting next year in order to help add 1 million B/D in production capacity by 2027.
As it looks to turn profits in the near future, Baker Hughes is counting on a big push to build liquefied natural gas (LNG) facilities, many of which will depend on its liquefaction technologies. Simonelli said 100 to 250 mtpa of new LNG capacity might be added to the global project pipeline over the next 2 years and that he expects the outlook to brighten from there.
The chief at Baker Hughes said, "a significant increase in natural gas and LNG infrastructure is required over the next 5 to 10 years in order to make natural gas a more affordable and reliable baseload fuel source that can be paired with intermittent renewable power sources."
Russia Exposure Shrinks, Still an Issue
Included among the hits Baker Hughes took during the quarter were $85 million in losses tied to the devaluation of its share of ADNOC Drilling and a $38-million loss in its investment value of enterprise software firm C3 AI.
But both figures pale by comparison with the $365-million loss the company reported from the winding down of its business in Russia which is facing international sanctions in response to its war with Ukraine. Simonelli said the size of the Russian loss was driven partly due to the company’s acceleration of its plans to suspend operations and sell off its business in the country.
Prior to the Russian-Ukraine war, Baker Hughes was expecting to pull in around $300 million in adjusted profits for the year from Russian projects. The company has since ceased all activity there related to its turbomachinery business and is in the midst of winding down its oilfield service unit.
Oilfield services represents Baker Hughes’ biggest business in Russia and saw revenue drop more than 50% during the quarter to about $60 million. The firm expects that figure will fall between $25 and $30 million in the coming quarter, or until it successfully divests its assets in Russia.
Halliburton's profitable quarter came despite a $344 loss tied to the value of its assets in Russia. It also recorded a $22-million impairment on the value of its assets in Ukraine. Miller at Halliburton said the firm now expects its exposure to Russia “to drop out in Q3” and be offset by a rise in international business elsewhere.
Schlumberger announced last quarter that it would halt new investment and the deployment of technology to Russia. Le Peuch pointed out that Schlumberger’s current business in Russia is in full compliance with international sanctions but that it is facing declining inflows.
The Schlumberger chief added that he expects the rise in business across Europe and West Africa to “more than offset” the loss of Russian revenue.