This holiday season “exceedingly grim” for oil field services companies, analyst says

Last Thanksgiving ushered in a collapse of oil prices after the Organization of Petroleum Exporting Countries refused to slash production to combat a growing global crude glut.

Still reeling from the fallout from that decision, oil field services companies are projecting exploration and production companies to curtail activity even more this holiday season as they run out of cash for the year amid a prolonged crude slump.

“We believe most operators have exhausted their 2015 budget and will take extended breaks starting as early as Thanksgiving,” Halliburton’s CEO Dave Lesar told investors during a third quarter conference call earlier this year.

Any further slowdown in the oil patch spells more trouble for battered oil field services companies that have been hammered by a plunging rig count and pressure from their customers to offer deep discounts.

“The overarching reality is: It’s exceedingly grim,” said Bill Herbert, analyst at investment banking firm Simmons & Co.

With domestic benchmark crude prices refusing to budge above $50 per barrel, services providers made a series of ugly predictions earlier this year that the fourth quarter would be even tougher than an already dismal third quarter as operators lay down more rigs and skip out on some of their typical end-of-year buying sprees.

“The winter season will have the normal negative impact on activity, which in the fourth quarter, is unlikely to be offset by the usual year-end sales of software, products and multi-client licenses,” Schlumberger CEO Paal Kibsgaard told investors in October.

The first weeks of the fourth quarter have already ushered in a further collapse in the U.S. onshore rig count and the final days of the year could get worse, as operators forgo drilling plans and slow completions, oil field analysts said.

“Budgets are just exhausted and the holidays make for a convenient reason to slow activity further,” said Bill Sanchez, managing director at Scotia Howard Weil.

In addition, some may cut back on well servicing activities more than they normally do this time of year, said Matt Marietta, equity research analyst at Stephens

“There’s typically a 4 to 5 percent decline from the third quarter to the fourth quarter in well servicing markets,” he said. “It’s now projected to be as high as 10 to 15 percent.”

Some service providers are holding out hope that activity rebounds once operators reload their budgets next year, but with oil companies declining to release details about their spending plans until the new year, it’s difficult to say how much they’ll spend or when they’ll start dropping cash again on new projects.

But the extended period of anemic oil prices doesn’t bode well, Marietta said.

“It’s all a function of cash flow at this point,” he said. “Exploration and production companies have made promises to their shareholders that they’re going to align their capital programs within cash flows. If we’re going into the year at a $40 crude price, there’s a good chance that, even though they have approval from the board of directors to spend that money, it’s unlikely you’re going to see a dramatic resurgence of spending without a higher commodity price.”

Completions activity may have a better chance of rebounding than drilling as operators slash spending on new projects and focus instead on the investments they’ve already made, Herbert said.

While any rebound is expected to happen gradually, services companies may have trouble ramping up operations quickly again to respond to a resurgence in operator spending because of the extensive layoffs and their cannibalization of idled equipment, Herbert said.

“One of the real unsung virtues of the Lower 48 unconventional production renaissance was the flexibility and the responsiveness of the services supply chain and now that’s being fundamentally impaired on multiple fronts,” he said. “The headroom for growth is being lowered.”