Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

U.S. oilfield service firms lag shale recovery; old deals hold

CommoditiesMay 25, 2017 01:50AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. An oil pump is seen operating in the Permian Basin near Midland

By Liz Hampton

HOUSTON (Reuters) - U.S. oil services companies have been doing a lot more work as recovering oil prices have lifted the shale industry from a two-year slump, but producers have been pocketing much of the new cash generated by rising output and squeezing service providers to keep costs down.

Oil service companies that provide the crews, labor and technology used to drill, construct and operate wells are lagging the recovery in U.S. shale producers. The lopsided situation could chill the production rebound or keep it from spreading to more shale fields, executives of services companies said.

Rising demand for certain services means raising salaries to attract workers and refurbishing equipment, while often being paid under fixed contracts signed during harder times, these companies said. That has pressured margins, leading to further losses. Law firm Haynes and Boone LLP said the U.S. oilfield sector experienced 127 bankruptcies between 2015 and April 2017.

Among the 10 largest oilfield service providers, just five were profitable last quarter, the same number as a year ago. In contrast, seven of the top shale oil producers posted a first quarter profit, up from just one a year ago.

"Both of us have to be able to earn a return and give something back to our shareholders," David Lesar, chief executive officer of Halliburton Co (N:HAL), the world's second-largest oilfield services company, said in an interview.

The sector is struggling to change onerous contract terms set when oil prices were much lower. Service companies agreed to those prices out of necessity; they needed cash flow to cover expenses. Those contracts, some of which extend into next year, are contributing to losses, preventing some companies from adding equipment or moving it to oil fields where it could be put to use.

The expiration of those contracts should allow prices for high-demand services to rise, oilfield services executives said.

Even so, some of the changes that shale oil producers made during the downturn are likely to stick, making it harder for service firms to drive up prices.

Oil producers have better returns today because of those cost controls, winning greater favor among investors.

"Many of (oil producers) have reduced capex spending and are increasing capital returns to investors," said Tom Bergeron, a senior fund manager for Frost Investment Advisors.

Shale firms have demanded deals that unbundle the functions of service providers, allowing them to spread the work out among more companies, who then have less leverage to raise prices.

Those practices allowed shale producer profits to start rebounding just a few months after oil prices began to recover from the $26 a barrel nadir of February 2016 (Clc1). But it left services companies without a way to immediately benefit from the U.S. crude benchmark's return to about $50 a barrel.

Service companies hope they can raise prices by the second half of this year, but for now there is limited scope to pass along costs, Chakra Mandava, an operations executive at Nabors Drilling USA, (N:NBR), said at an energy conference this month in Houston.

Nabors blamed its first quarter loss on an inability to offset costs for new staff and equipment.

Keane Group (N:FRAC), which supplies pressure pumping services, one of the highest demand services in the shale patch, reported a first-quarter loss due largely to long-term, fixed price contracts, despite a 59 percent jump in revenue from the fourth quarter.

One proposal that might resolve the disconnect between oil price moves and contract changes is to tie deals to the cost of crude.

Apache Corp (N:APA), which plans to drill some 250 wells this year in the Permian Basin, is looking to tie what it pays for services to the U.S. crude benchmark (CLc1) - converting fixed service costs to a variable cost in order to cushion the hit to earnings of future oil-price changes.

That way, if crude prices rise, Apache could afford to pay more for services, but would pay less if oil drops. Chevron (N:CVX) also is tying some of its contracts to indexes in a bid to remain competitive, the company said at a recent security analysts meeting.

"We're just opening up the business model to what's possible," Michael Behounek, a senior drilling advisor for Apache, said in May at a drilling conference in Houston. "We want to put a dampener in place."

"They [service companies] don't want to ride the roller coaster either. If we go down this route, it might be good for both parties."

U.S. oilfield service firms lag shale recovery; old deals hold
 

Related Articles

Oil gains more than $1/bbl after Saudi price hike
Oil gains more than $1/bbl after Saudi price hike By Reuters - Dec 05, 2021 3

By Florence Tan SINGAPORE (Reuters) - Oil prices rose by more than $1 a barrel on Monday after top exporter Saudi Arabia raised prices for its crude sold to Asia and the United...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email