Smallest look weakest

Slammed by plunging oil prices, oil services companies that supply rigs and carry out seismic surveys face a bleak outlook of cutbacks and contract cancellations. Peer through the gloom though and possible winners as well as losers emerge.

Titans of the sector such as Schlumberger NV and Halliburton Co may have a chance to scoop up assets and know-how from rivals less able to weather the downturn, as their deeper pockets give them a major tactical advantage.

"The larger companies, which still have access to credit, can take the opportunity to regenerate their own fleets at a cheaper cost than if they had to build it themselves," said Pascal Menges, portfolio manager for Lombard Odier's Global Energy fund. Schlumberger was one of his top three holdings as of end-December, according to the fund fact sheet.

By contrast, drillers have faced a collapse in day rates as they battle with overcapacity. Norway's Seadrill Ltd for instance has seen its shares plummet 66% in the last 12 months, a prime casualty of the shakeout. It has suspended dividends and its 2018 floating rate note yields 12%.

Right now, the pain is being felt across the sector.

Schlumberger, the world's biggest oilfield services provider, said on Jan. 15 it would cut 9000 jobs, or about 7% of its workforce. Halliburton is making similar cuts as it merges with Baker Hughes.

Yet by slashing headcount and retiring older seismic vessels they could emerge leaner, stronger and well placed to pick up assets from smaller, weaker competitors.

"Within oilfield services it's best to hold the bellwether stocks as they will be taking market share," Menges said. "They're able to buy attractive assets at a discounted price and come out of the cycle in a much stronger position."

Recently Schlumberger took a stake in Russia's Eurasia Drilling, potentially paving the way for it to become sole owner of the most active oilfield services company in Russia, the world's biggest oil producer.


Greater strain

Not that the likes of Schlumberger and Halliburton will have things all their own way. Some oil majors are demanding cheaper but better services from engineering and service companies, or simply taking work back in-house, after losing US$400 billion on cost overruns in the last five years.

While the leaders have the products, global diversification and financial strength to weather a sustained drop in activity, smaller players are under greater strain.

"Smaller companies with weaker market positions, limited product or service-line diversification, geographic concentrations or elevated financial leverage will be far more vulnerable to reduced E&P (exploration and production) spending," said analyst Pete Speer at credit agency Moody's.

Market ratings reflect such trends. Seadrill is trading on just 4 times prospective earnings, Reuters data shows; Subsea7 SA is on 6 times, having plunged 40%, while Aker Solutions ASA, down 43%, is on 7 times.

Elsewhere Transocean Ltd, once the service sector's biggest company by market value, has said it will scrap seven move vessels bringing the total in recent months to 11, and may cut more. Its stock is on 7 times forward earnings, having dropped 66% over the past 12 months.

By contrast, Schlumberger and Halliburton are valued at 20 and 16 times.

Still, the sector remains acutely sensitive to oil prices and analysts warn its problems will take some time to play out.

"In 2009, E&P spending dropped 15 to 20% and it is likely that we will see something of the same over 2015 to 2016," said Sondre Stormyr, a Danske Bank analyst. But while assets were temporarily idled in 2009, he expects to see more permanent supply reductions this time, particularly for segments with a lot of outdated supply such as drilling.


At the sharp end

Companies likely to feel most pain tend to fall into three segments: onshore shale well services in North America, drillers and seismic survey firms.

All are at the sharp end of E&P and Erik Reiso, a partner at consultancy Rystad Energy, argues the shorter investment cycle and rapid turnover of wells in U.S. shale mean companies servicing that sector will see a drop in demand more quickly.

Earlier this month, U.S. onshore driller Helmerich & Payne said rates for its rigs had fallen 10% from the previous quarter.

By contrast, offshore players tend to be locked into projects with longer investment cycles. "Once you've started an offshore project, it's hard to stop it," Reiso said.

Drillers are expected to be particularly hard hit because 2015 will see a peak in new capacity coming out of the yards, a large proportion of which is still uncontracted.

"For the offshore drillers we were bearish even prior to the oil price drop because there is some 12 to 13% supply growth in the next two years," said Alexander Jost, a credit analyst at SEB.

Seadrill, a deepwater rig operator, formally suspended its dividend in November so it could finance its order book of new vessels, with 16 rigs under construction.

Analysts at brokerage Bernstein Research sees little short-term optimism. "We see half as much new work in 2015 as 2014, which was already half of prior years, and forecast no material recovery before 2017," they said in a research note.

"We find our coverage group has a capital base three times as high as in 2009, with profitability 30% worse. The confluence of these two factors will be disastrous."


Source: Rigzone

Adapted from press release by Joe Green

Published on 26/01/2015


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