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Oilfield Services in 'Complete 180,' as Rebound Faster Than Forecast, Says Evercore

The pace of the North American oil and natural gas recovery is surprising to the upside, as "the bottom is clearly in," an Evercore ISI energy analyst said Monday.

The mood today is a stark contrast to one year ago when customers were focused only on costs, according to Evercore's James C. West, senior managing partner. He presided over a webinar on Monday to discuss oilfield service (OFS) company takeaways following company visits in Houston last week. In total, Evercore's team visited with 20 oil service, equipment and drilling companies.

"Visibility has dramatically improved and service providers now have a clear line of sight to sustainable profitability," West said. "Despite the tremendous year-over-year improvement in sentiment, the OFS industry is approaching the upcycle cautiously and is determined to retain structural efficiencies wrought from the downturn."

The 10% slide last week in West Texas Intermediate (WTI) crude oil breached the "optically important" $50/bbl threshold. "Nonetheless, the year-over-year improvement in sentiment was inexorably tangible, and service companies were practically giddy" compared with the year-ago event hosted by Evercore.

West said his team witnessed a "complete 180" among OFS players. The 12-month U.S. oil price overall continues to improve, with the exception of pressure pumping and sand, where pricing "is surprising to the upside." Meanwhile, both large and small operators were able to take advantage as business dwindled by streamlining operations and high-grading their offerings. A big focus now is on "big data," he said.

Meanwhile, those with their ear to the international land market are seeing a quicker rebound than forecast, while the bottom for the deepwater "is closer than most expect." A few merger and acquisition opportunities are available, but in general, "large transformational deals have likely passed."

Year of Transition in North America

Specifically in North America, utilization and pricing have improved as expected, while increasing input and labor costs as pass-through costs could accelerate absolute earnings growth even more.

"Service companies are being compensated for upgrades and reactivation costs as the public universe looks to prioritize margins over utilization, again a stark contrast from the downturn for many companies," West said. "Discipline has improved across most product lines, making pricing increases more a question of 'when/to what magnitude,' not 'if.'

"Overall, we get the sense that 2017, especially the first half, will be a year of transition" in North America.

The OFS sector in North America in general has been surprised by the pace that the land market has recovered, West said.

"Despite still modest profitability, companies are reactivating stacked equipment with a few kicking off new capital spending programs, in some cases to keep up with newly capitalized private companies and grow basin-level scale to sufficient levels."

Fracture pricing is rising, but the slope of the trajectory hinges on several things, with commodity prices ultimately the deciding factor. The decline in WTI last week shifted the pendulum toward the exploration and production companies, "as caution supplants urgency," West said.

However, the OFS operators control supply, and the pressure pumpers have been treading carefully, even against a tightening North American market. Pricing may need to take "another leg up to broadly incentivize equipment reactivations, and substantial improvement is necessary before new equipment orders become viable on a large scale."

While this may be a once-in-a-generation transition, it's resulted from a once in a generation downturn, West noted. The slump reminded the OFS operators of the "brutal vicissitudes of commodity cycles and prompted introspection regarding the sustainability of business models shaped during a $100/bbl crude environment."

The OFS survivors have emerged lean and mean, "with an unquenchable thirst for efficiency. Multiskilling and automation are evident across all subsectors and will become requisites to compete."

The job market also should pick up as the recovery moves forward, but it won't be even or broadly felt as the industry remains more focused on maximizing efficiency and cutting costs.

Big Oil Embracing Big Data

The oilfield is digitizing quickly, West said.

"In our conversations with management teams, the term 'big data' may have rivaled 'oil' in terms of usage. The oil industry's lagging adoption of big data analytics has been well documented; however the downturn has forced companies to rethink their business models and digitalization is rapidly gaining momentum."

Of note is the ascent of General Electric (GE), a digital powerhouse, into the OFS ranks as it prepares to take over Baker Hughes Inc. this year.

"Competitors have taken note, and everyone from large cap diversified leaders like Schlumberger Ltd. and Halliburton Co. to offshore drillers like Rowan Cos., and virtually everyone in between, are focused on digital advancements."

For example, National Oilwell Varco Inc. executives recounted "stunning customer receptivity" to new technology over the past few months, especially for software that integrates machines with process controls.

"Onshore contract drillers are equally optimistic at the prospects of further improving drilling times by leveraging years of drilling data. Likewise, completion companies see harnessing this data as the next leg in their perpetual quest to optimize production..." Over the downturn, operators were forced to break out of their lethargy, and "procedures, workflows and ideologies are all now designed with efficiency in mind."

Could the transition underway be part of the "fourth industrial revolution" envisioned by GE?

"What I know is this movement is by necessity," West said. "As the old model breaks, a new one emerges...Change is hard, but change is usually for the better..."

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