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Oilfield Services, Proppant Providers See Domino Effect from Falling Rigs

The impacts of falling rigs in North America are having a domino effect along the supply chain, and pressure pumping suppliers are facing what could be an uncertain future as they begin to unveil earnings results.

Drilling rigs are dropping mostly in oilfields, but the impact is being felt in natural gas fields as well. That should mean less demand for completion services like sand used for pressure pumping. However, operators last year began to pump up their use of proppants, sand and ceramics, to squeeze more reserves from shale and tight resources (see Shale DailyNov. 12, 2014).

On Thursday, Helmerich & Payne, one of the biggest onshore drilling contractors, and proppant provider Carbo Ceramics Inc. will issue their results. Earnings season for the onshore exploration and production (E&P) sector gets underway in the next week. It should be a tell all for where land drillers/pressure pumpers are headed over the next two years. The "big three" oilfield services (OFS) companies, Schlumberger Ltd., Halliburton Co. and Baker Hughes Inc., cut their views for 2015 and all three indicated they are working with E&Ps on pricing.

Robert W. Baird & Co. analyst Ethan Bellamy expects spot market prices and demand for sand to "decline substantially" this year. "The longer oil prices remain low, the worse the pricing environment will be for sand suppliers."

Hydraulic fracturing (fracking) technology is expected to mitigate the slowing growth for proppants among the larger operators, however. Moody's Investors Service credit analysts said the largest onshore operators, which include U.S. Silica and Fairmount Santrol, are well positioned to weather softening demand in part because they also sell into the industrial, specialty and recreation end markets. In addition, they've got more reach, i.e., terminals serving the basins where the drilling is happening, which gives them the competitive edge.

Moody's Senior Credit Officer Karen Nickerson said the earnings of proppant companies "are at high risk following the severe decline in oil prices in the latter half of 2014 because these companies generate substantial revenue, and in some cases all of their revenue, from oil and gas end markets...The degree of earnings decline will depend largely on where prices level out."

If oil prices were to come back to Moody's base-case assumptions, which are $75-80/bbl, earnings would be "modestly" impacted, Nickerson said. If prices were to remain close to or below Moody's stress assumption, which is $60, "we expect contract volume and prices to be renegotiated, resulting in a meaningful decline in 2015 earnings for proppant providers."

The outlook for OFS is dimmer today than it was less than two months ago. The U.S. rig count continues to decline, and as of this week, it appears to be trending toward a fall of as much as 40% by the second half of 2015, according to Tudor, Pickering, Holt & Co. (TPH).

Analysts at the Houston firm cut their estimates on Monday for the OFS sector for the second time in six weeks, setting a median reduction of 20% for 2015 earnings estimates. They reduced 2016 estimates by 16%.

"We’ve been very open that our underlying assumptions were headed lower," the TPH team said of the sector. Access to outside capital from high yield/equity markets "could make for a stronger" 2016, but they don't count on that yet. "The depth of this activity contraction makes swinging for the fences in oil services hard."

The spread between Baker Hughes and RigData rig counts on reported activity reductions continues to slide, TPH noted. TPH uses RigData for its weekly roundup, and it is showing the U.S. count down more than 500 since its peak last fall, off 25%, with 500 falling in the past two months alone. Directional rigs are about the same level they were two months ago, but horizontal rigs are falling in tandem with verticals now, down about 45% in six weeks, according to TPH.

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