The new year will usher in more tough times for oil field services companies, as penny-pinching exploration and production firms curtail their spending in the oil patch deeper than once expected, according to a new analysis.
Although oil markets are expected to mount a recovery in the second half of 2016, the first part of the year will prove to be difficult for oil field services providers that have already been struggling with a dramatic collapse in oil patch activity.
“Look for a roller coaster ride in early 2016 for oil field services, followed by outsize gains in the second half,” Raymond James analysts wrote.
That retreat from U.S. oil fields will continue for the next few months, as cash-strapped companies, with dwindling options for obtaining financing, ratchet back their spending plans through at least the second quarter of 2016 as they wait for a significant rebound in crude prices. Raymond James said it now expects annual oil field spending to fall 42 percent amid “skinny E&P cash flows and a non-existent debt market,” analysts wrote in a morning note to investors. (Although, the analysts noted, a surprise uptick in oil prices could dramatically change spending habits, with a small $5-a-barrel swing in crude translating into a 20 percent shift in cash flows).
They predict the U.S. rig count will continue falling over the next six months, with drillers expected to sideline another 150 rigs by mid-year. That pullback could cause the rig count to fall to 550 before shale plays begin to see an uptick in activity again, a dramatic decline that implies “a much uglier fundamental year than current consensus estimates,” Raymond James analysts wrote. The rig count should pick up again in the second half of the year as production declines draw down the global glut of crude, and help support higher oil prices.
Raymond James says drillers will add 200 rigs between June and December, with the recovery accelerating in 2017, when Raymond James expects 463 more rigs to head back to work. Still, the analysts warned that the rebound in oil field activity will trail an uptick in spending.
“Labor and service availability likely becomes a major constraint on the ability to meet activity demand,” the analysts wrote. “This should be compounded by oil field service pricing increases as the market for services gets tighter.”
Any additional declines in activity and rig count, even if short-lived, spells more trouble for services companies, which have seen their earnings pummeled in the past year. Companies best positioned to ride out the prolonged slump are the bigger, more well-known names with “dominant market share and clean balance sheets,” the analysts said.