Offshore logjam breaking as oil field services sector rebounded in 2010
Strong oil prices and rising E&P budgets leading continued strong oil field services activity and improving financial performance in 2011. In IHS Herold Special Update on the Oil Field Services Sector issued this month indicates a healthier growth outlook for the industry in 2011 now that the US Gulf of Mexico drilling moratorium that was enacted in 2010 has been lifted and offshore service companies can get back to work in the deep waters of the Gulf. According to the update, a general recovery is being driven by continued strong oil prices and rising worldwide exploration and production (E&P) budgets, despite the negative impact of the drilling moratorium that constrained what would have been a strong rebound for the sector.
The update, which compared key oil company financial performance for the entire 2010 calendar year against sector performance for 2009, included multi-service companies such as Baker Hughes, Halliburton and Schlumberger as well as offshore drillers Transocean and Diamond Offshore among others.
“As we mentioned in our preliminary report issued last December, many of the service companies, and, in particular the offshore drilling companies, took a financial beating following the Gulf drilling moratorium. That negative impact constrained what was otherwise a substantial recovery for the sector compared to 2009 results,” said John B. Parry, principal energy analyst at IHS and author of the IHS Herold Update on the Oil Field Services Sector. The financial performance of the six multi-service companies studied benefitted largely from rising oil prices and unconventional oil and gas drilling in North America.”
While the multi-service companies were hit hard by the moratorium, their four cousins in the offshore drillers’ category took an even harder financial beating in 2010, with all reporting negative growth in revenue for the year. The exception was Rowan, which returned a modest three percent growth in revenue in 2010.
“This week, we expect that offshore drillers are breathing a collective sigh of relief with the dual news that US regulators granted the first deep-water offshore Gulf permit and PEMEX announced plans to re-launch its deep-water drilling program, since both efforts were suspended in the wake of the Macondo oil spill last May,” said Parry. “The post-Macondo repercussions depressed the financial performance of publicly traded offshore drillers in 2010 as evidenced by the results of its leading providers.”
While the industry is still facing oversupply of its ageing jack-up fleet, Parry noted, much of that type is in the process of being upgraded, which alone with the influx of new-build deepwater floaters without long-term contracts still presents a challenge for sector profitability.
The update noted that North American oil and gas shales, along with other tight plays, will continue to be a prime driver of North American activity through much of 2011, albeit with some leveling of activity as the year progresses due to concerns over developing excess gas supply. IHS also expects a gradual easing of constrained pressure-pumping capacity for fracing in North America as the year progresses.
Based on reports from companies in the sector, larger drilling budgets are expected as the logjam of work opens up and companies call on service providers to engage their rigs in more traditional regions of the world in 2011 and 2012. Deep-water opportunities such as in Brazil and in both East and West Africa should also begin to help soak up some of the excess supply, and rig retirements, particularly in the jack-up category, could also help, Parry noted.
“The multi-service providers are generally bullish on markets outside of North America, with Latin America and South America particularly robust in terms of growth,” he said. “In other regions, client budgets are now in alignment with oil-price expectations, which will generally support higher demand for the sector’s services, but the rates of improvement will vary.”
Last year, Baker Hughes led the pack of multi-service providers, with a 49% increase in revenues ($14.4 billion in 2010 vs. $9.6 billion in 2009) followed by Halliburton, which posted a 22% increase in revenues for the same period ($17.9 billion vs. $14.6 billion); and Schlumberger, which saw its revenues rise 21% year-over-year ($27.4 billion vs. $ 22.7 billion in 2009).
Shifting resources to meet strong demand for US onshore drilling and other international projects helped many service companies turn the earnings tide back to a more positive flow. As might be expected, multi-service providers fared better than offshore drillers, who either saw declines in revenue or marginal revenue growth. Rowan posted nominal revenue growth of three percent ($1.8 billion in 2010 vs..7 billion in 2009), but Transocean, owner of the Deepwater Horizon rig involved in the Macondo incident, took the hardest hit, with a 17% plunge in revenue and a 43% drop in earnings.
As for the outlook beyond 2011, Parry said, it looks positive. “We expected offshore contract drillers to see increased demand for their newer, more technologically advanced rigs. With offshore rig new-builds, the multi-service providers should see some benefit as well. Meanwhile, expectations for favorable earnings growth in 2011 and 2012, and the heightened pace of industry transactions continue to be a drawing card for investors even though the full cost implication of the Macondo incident for this industry is as yet uncertain.” He said the transaction activity, aggregating $55 billion since January 2009, underscores the urgency for the industry to remain competitive in the growing, but changing, market being served.
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