The growing abundance of shale gas and liquids production is leading to a "paradigm shift" in the global oilfield services industry that should lead to business growth over the next two years, especially in the U.S. land market, FBR Capital analysts said in a new report.
Analysts looked at the worldwide implications for the service industry because of massive shale development. In addition, they looked at the growing availability of sophisticated oil services, as well as accelerated exploration and production (E&P) spending.
"The growing abundance of shale gas and liquids, the continued pursuit of oil in increasingly complex environments, and a rapid escalation of service intensity cannot be understood within the constraints of normal energy industry cyclicality," the analysts noted. "Our expectation is that the current industry environment will be broadly to the benefit of oil service providers, but we expect upside to most surprise investors in the U.S. land market, especially stimulation and related services."
A "long-run secular trend" toward more service intensity, and thus expanding margins, is expected for several reasons.
E&Ps, the report noted, increasingly have moved toward oil development "in hostile environments requiring specialized service treatment, and in order to meet such demanding expectations, service companies are employing increasingly sophisticated technologies. Additionally, the development of shale resources, first in the U.S. and then internationally, should prove to be a service-intensive, margin-enhancing activity."
Expanding international margins because of increased oilfield services work were expected to drive value in 2011, the FBR analysts noted. However, "we also see strong prospects in the North American land market due to U.S. liquids-focused investment."
Some investors expect the U.S. land services market to peak this year, but the FBR analysts think otherwise. A supply/demand review "suggests that the U.S. fracturing business will remain healthy as the drop in U.S. dry gas-basin rig count will be offset by increased investment in liquids-rich plays. Wells drilled in these liquids-rich plays will continue to enjoy superior economics to dry gas for as long as the crude-to-gas price ratio is high."
Even though gas markets currently are oversupplied, the move by E&Ps to a mix of heavier hydrocarbons with more condensate, natural gas liquids and increasingly crude oil "causes liquids-rich production to, in most cases, correlate more closely" with West Texas Intermediate crude prices than gas, which preserves the well economics.
Strong earnings results overall by the oilfield services group in 4Q2010 are forecast to continue through 2012 "based on strength in U.S. land and expansion of international margins...North American land was particularly strong this quarter, which lays the foundation for what we believe will be dynamic growth in the segment going forward."
In addition, the analysts estimated that service operators will increase capacity by 37% this year and 27% in 2012, but the changing mix in production and "modest" rig count growth will cause demand to outstrip supply over the next two years.
"We expect the backlog of drilled but uncompleted wells to grow through 2011 and start to flatten out in 2012."