Thursday, July 27, 2017

The Coming Squeeze For Shale Oil Drillers

Oil field services firms see improvement in the U.S. shale patch, but rising margins may come at the expense of oil and gas producers’ profits.

By Spencer Jakab
The Wall Street Journal
July 24, 2017

Rising profits for oil-service companies usually means oil producers are making money, too. But when the producers are drilling high-cost oil from shale, rising expenses could squeeze profits and lead them to scale back growth.

That is the message from earnings at Schlumberger SLB -0.03% and Halliburton , HAL 1.48% the world’s two largest oil service providers, which reported strong results this week but said the boom in new shale drilling has likely ended.

The number of rigs drilling for oil and gas in the U.S. has more than doubled in the past year. Paradoxically, though, Halliburton executive chairman David Lesar noted that a “tapping of the brakes is happening all over the place in North America” even as he sees stronger margins ahead.

Schlumberger’s executives said last week that its pressure-pumping equipment is in very high demand in the U.S. shale patch, but chief executive Paal Kibsgaard sounded a skeptical note. He said that U.S. land-based producers are “largely driven by the U.S. equity investors who are encouraging, enabling and rewarding short term production growth in spite of marginal project economics.” He also suggested that activity would moderate.

The fact that these comments are being made with U.S. crude prices hovering around $46 a barrel would have been remarkable three years ago. Back then the conventional wisdom held that the break-even price for spending any money on shale formations was somewhere in the $60-$70 a barrel range.

That number has come way down, much to the chagrin of producers in the Organization of the Petroleum Exporting Countries and major non-OPEC power Russia that were scrambling to stabilize prices at a meeting in St. Petersburg. Much of it stems from innovation—squeezing more oil out of each well. But part came at the expense of oil field services companies that saw margins collapse. That trend is reversing.

“The rig count is up. There are less underutilized assets sitting around, and that puts oil field services companies in a stronger position,” says Rob Thummel, portfolio manager at energy-focused investment firm Tortoise Capital Advisors.

In addition to services such as pressure pumping, other important costs for shale producers such as sand are rising. As employment streams back into the business, labor costs may also go up. Unless producers can innovate away the increased costs of services, materials and labor, or OPEC’s discipline forces prices higher, this inflation will eat away at their margins and make them less likely to drill as many new wells.

Article Link To The WSJ: