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U.S. Onshore Oilfield Services Rebalancing as Spending, Activity Decline

The U.S. oilfield services (OFS) sector is going to recover at some point over the next few quarters, and even though its footprint may be smaller, fewer, high-tech rigs should be able to recover more reserves than at any time in the past.

Douglas-Westwood (DW) analyst Jacob Halevy, who is based in Houston, said the domestic sector is going through a rebalancing act, in large part because OFS operators now plan to spend nearly one-third less this year than in 2014.

"When the price of oil started its tumble late last fall, so too did the OFS market," Halvey said this week. With the rig count half of what it was a year ago, "some of the major U.S. shale plays are being hit harder than others, some will bounce back quickly while others may start to fade away."

DW is forecasting a 34% cut in total U.S. OFS spend this year for the 20 services that it covers. Two big shale plays are likely to see the brunt of the lower spend, the Bakken and Barnett.

"On a basin-by-basin level, the Barnett and the Bakken will be hit hardest," Halevy said. "The Barnett rig count has continued its steep decline from a 2008 peak, now with only four rigs drilling for gas. With the fall in oil price, operators in the Bakken will spend 40% less on services in 2015. The Bakken is one of the more expensive shale plays and the low price environment will lead to fewer wells being completed and intense cost-cutting pressure on services companies.

"Conversely, the Marcellus is likely to be hit the least as recently the gas drilling market has not suffered to the same extent as the oil plays."

As an example of why spending is going to fall, Halvey pointed to lower spending plans for proppants used to fracture horizontal wells. More expensive ceramic blends are seen taking the biggest hit.

"Here we expect operators' spend to fall by 42% in 2015 as a result of a strong decrease in demand and a shift away from ceramics toward cheaper sands. While all drilling and completion-led services will suffer in 2015, those driven more by the active wellstock will suffer less than new drilling activity." Historically, services including artificial lift and slickline services "have been less directly correlated to oil price and are less affected by downturns."

The key question to answer over the coming months, when producers get back to work, is what types of rigs they may use, according Tudor, Pickering, Holt & Co. (TPH). The oil service research team said the "easiest money" already has been made since oil prices plummeted. Once the equity market realizes that the domestic rig count isn't going to fall to zero, the OFS sector should begin to strengthen.

The talk among the exploration and production (E&P) companies is they will "selectively" put some rigs back to work. The TPH analysts plan to watch for specific data points this summer.

"Will the best rigs really go back to work first? This has been (and still is) our baseline assumption with regard to the overall U.S. land rig count recovery in 2015-2016. Now the rubber hits the road..."

They pointed to domestic land rig giant Helmerich & Payne Inc. (HP), which this week reported it had idled 169 FlexRigs, its alternating current (AC) line, mostly within the Permian Basin, Eagle Ford and Bakken plays.

"Stated differently, the U.S. land drilling industry's largest player now has more idle AC-drive FlexRigs than it does contracted (161 on May 15). To the extent that we don't see idle AC-drive rigs (industrywide) go back to work first in coming months/quarters, then it will naturally beg the question of why..."

As first quarter reports were unveiled, a lot of buzz by the OFS operators was about not having a spot market dayrate because E&Ps were releasing rigs as soon as they could wherever they could, regardless of the quality or age of the equipment. However, HP since has contracted "a handful of FlexRigs in the spot market to customers which are high-grading the rigs in their drilling programs," TPH said.

The TPH team also looked at changes within the rig business for Patterson-UTI Inc. Data suggest that it's had a few previously idled rigs go back to work in recent weeks as well.

Based on what they now see, analysts said the overall AC-drive rig count is down 40% since its peak, while silicone-controlled rectifier rigs are off 60% and the mechanical rig count has dropped 70% or more.

"This renders 315 idled AC-drive rigs, which combined with the continued modest newbuild activity for the industry serve as the capacity overhang to be first chewed through before leading edge pricing can think about turning to the upside," TPH analysts said.

DW's Andrew Meyers, also based in Houston, said there are a lot of questions remaining about the OFS sector. He noted that ConocoPhillips CEO Ryan Lance said many producers are trading at valuations still reflected in an oil price closer to $80/bbl, while private equity executives have told DW that many bid-ask spreads are too wide on transactions for E&Ps, particularly the unconventional players.

"This is inhibiting some of the necessary revaluation and consolidation that will lead to a more normalized market environment," Meyers said. "So oilfield service providers remain in limbo and investors struggle to mark them to market. Until management of service companies can assess market pricing, future activity levels and an understanding of which of their customers are going to be active, short-term strategic plans remain fluid and long term strategies in jeopardy."

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