Recent oil price volatility has made exploration and production (E&P) companies skittish, and the uncertainty around their spending plans may delay a broad-based recovery, according to Schlumberger Ltd. and Halliburton Co.
Schlumberger delivered its fourth quarter and 2018 results last Friday, while Halliburton issued its results on Tuesday. Both are betting on strong gains in the second half of the year, but the sharp decline in oil prices late last year sent E&Ps scurrying for cover, leading to an oversupply of drilling equipment for North American land services.
During a conference call, Schlumberger CEO Paal Kibsgaard noted that some E&Ps already have reduced their capital expenditure (capex) plans for 2019. Recent discussions offer “clear signs that E&P investments are starting to normalize and reflect a more sustainable financial stewardship of the global resource base. For the North America land E&P operators, this means that future investments will likely be much closer to the level that can be covered by free cash flow.”
Assuming increased capital discipline continues in 2019, and if West Texas Intermediate oil prices steadily recover to average around same realized level as 2018, “we expect E&P investments in U.S. land to be flat to slightly down compared to 2018, with a relatively slow start to the year.”
It is likely, Kibsgaard said, that U.S. E&Ps will “gradually lower drilling activity and instead focus investments on growing down the large inventory on drilled and completed wells. This approach would still drive production growth from U.S. land in 2019, but likely at a substantially lower rate than the 1.9 million b/d seen in 2018 and potentially with a further reduction in the growth rate in 2020.”
Other issues in the Lower 48 also are on the horizon, as “an increasing percentage of the new wells drilled are being consumed to offset the steep decline from the existing production base.
“Third-party analysis shows that in 2018, this number was 54% of total capex, and it is expected to increase to 75% in 2021, clearly demonstrating the unavoidable effect of shale oil production.”
In addition, “emerging challenges” are underway in parent and child wells, which impacts production per well.
Drilling steadily is stepping out from core acreage, while lateral lengths and proppant/stage are “starting to plateau,” which means “we could be facing a more moderate growth in U.S. shale production in the coming years than what the most optimistic views have been suggesting.”
Last year ended with a “near perfect storm,” as oil prices turned south. The price dive was blamed mostly by a surge in U.S. onshore production, “surprising to the upside…” resulting in “significantly lower land activity in North America” to the end of December. Most of the slump was seen in the Permian Basin, as activity was impacted by the domino of production takeaway constraints that began in the middle of 2018.
North American revenue in 4Q2018 decreased 12% from the third quarter, “as customers dramatically cut fracturing activity in response to lower oil prices,” Kibsgaard said. “Although we were expecting weakness in the Permian, facts were exacerbated by a further drop in the oil prices.”
In response to the sudden downturn, Schlumberger warm-stacked fracture fleets in its North American land business in the second half of the fourth quarter and instead focused on securing dedicated contracts for the first half of 2019 early in the tendering cycle. Clipping the fracturing fleet resulted in revenue from the onshore pressure pumping business OneStim declining by 25%.
“U.S. land drilling activity on the other hand proved robust during the quarter, with the rig count being largely flat sequentially and the wells drilled for rig remaining stable, despite average lateral lengths continuing to increase,” said the CEO. “In this market, our operational efficiency, new technologies and broad range of business models helped drive drilling and measurements revenue higher in both the U.S. and Canada.”
This year, North American land activity should follow “a slow but steady recovery,” with a lingering impact from the pricing reset that took place in 4Q2018.
“For drilling we expect some impacts...from a potentially lower rig count” in North America, Kibsgaard said. “However, our high-tech drilling business remains sold-out and is still at a relatively low market penetration and should therefore be quite insulated from a lower rig activity.”
The U.S. artificial lift business, which operates at the 12-to-18 month lag from the hydraulic fracturing business, also is expecting a “solid year.”
To cope with uncertainty in the months ahead, Schlumberger has built “significant flexibility into our operating plan for 2019, which gives us the means and confidence to address any investment and activity scenario,” Kibsgaard said. “Furthermore, the foundation for our 2019 plans is a clear commitment to generate sufficient cash flow to cover all our business needs, without increasing net debt.”
Net income in the fourth quarter totaled $538 million (39 cents/share), reversing year-ago losses of $2.25 billion. Profits fell 16% sequentially in part on lower oil prices. Revenue was down 4% sequentially in the fourth quarter at $8.18 billion, while North American revenue fell 12% sequentially. Halliburton Sees Continuing Pricing Pressure
The No. 1 completions expert in North America, Halliburton CEO Jeff Miller said pricing pressure is likely to continue through the first quarter because of an overabundance of fracturing equipment.
Miller said reloaded capex budgets mean E&Ps are going back to work. However, the pace is slow, with less spending than anticipated.
“We intend to dynamically respond to the changing market environment, reduce capital spending, develop differentiating technologies and generate strong cash flow,” he told investors.
Maintaining capital discipline was a recurring theme during the hour-long conference call.
Miller parlayed conversations with E&P customers, noting that the oil majors are likely to “stay the course on their budget plans, and as many of them recently shifted their investment priorities” from the offshore to shorter-cycle North America onshore plays.
The large independents, which last year began budgeting for $50/bbl West Texas Intermediate (WTI), means “their spending should be mostly flat in 2019,” Miller said. But for the smaller-to-mid cap E&Ps, with limited access to capital, 2019 expenditures may be cut “most aggressively.” Still, the small operators also are “the most flexible on budget expansion, if the market is supportive later in the year.”
In the near term, however, the call for North American completions and production (C&P) services is down as the WTI pricing downturn in 4Q2018 “created excess equipment capacity in the market and had a detrimental effect on services pricing.”
First quarter revenue in turn is forecast to fall sequentially.
Newly appointed CFO Lance Loeffler, formerly the investor relations chief, said sequential revenue in the C&P division is forecast to decline “mid-to-high single-digits with margins decreasing 300-400 basis points. For our drilling and evaluation division, we anticipate sequential revenue will experience a decline in the mid-to-high single-digits, largely in-line with prior-year declines, with our margins declining by 100-150 basis points.”
Beyond the first quarter, prospects look better for Houston-based Halliburton, which is celebrating its centennial this year, Miller noted.
A higher-than-ever level of drilled but uncompleted wells, aka DUCs, across North America offers a “future revenue opportunity,” and in the second half of the year, takeaway capacity constraints in the Permian Basin should start to improve as pipelines come online.
“That means many customers should go back to work during the second quarter to get production ready for the new pipelines,” Miller said.
Increased oil price volatility has created “near-term headwinds as we enter 2019,” but “demand fundamentals for multi-year industry growth are still intact. While short-term oil and gas demand changes are hard to call with precision, we know that the need for energy is consistently growing.”
North America is now the world's top oil producer, which means it “exerts considerable influence on commodity pricing. Second, the industry has cut a lot of costs out of the system and introduced significant efficiencies. And last, but certainly not least, 2018 was a year of transition to a more disciplined free cash flow approach by many customers in the North American E&P industry.”
Technology Still Key
Miller also spent a few minutes discussing some of Halliburton’s latest technology offerings, which are the lifeblood for the OFS sector. Last year the company received nearly 900 patents, a 10% increase year/year.
“It is critical to understand how we prioritize technology investment,” he said. “Over the last few years, technology has driven substantial operational and surface efficiencies in North American shale. I believe the future of unconventional technology will be more heavily weighted toward enabling higher well productivity.”
Last year Halliburton introduced the Prodigi AB intelligent fracturing service, which now has been deployed across the U.S. land segment. The service is designed to improve automation and “consistent cluster performance,” in fracture stages, with less wear-and-tear on equipment.
“It has been used on more than 1,450 stages for 20 different customers across the country, from the Eagle Ford Shale in South Texas to the Bakken formation in North Dakota,” Miller said.
Net income in the fourth quarter was $668 million (76 cents/share) versus a year-ago loss of $825 million (minus 94 cents) and from $435 million (50 cents) in 3Q2018. Revenue was nearly flat year/year at $5.9 billion, but it was down sequentially by 4%. Operating income of $608 million climbed from $383 million a year ago, but it was off 15% from the third quarter.