Oilfield servicing companies lost half of their values to COVID-19
World renowned oilfield servicing (OFS) companies that have huge presence in Nigeria are some of the worse hit by Covid 19 pandemic as their capital base have been seriously eroded.
Some of the companies, such as Schlumberger, Halliburton, Saipem, Transocean, Baker Hughes dominate the oil servicing industry in Nigeria.
The implication of this is that their investment portfolios in Nigeria are going to be severely affected. This situation might lead to cuts in the number of their employees in the country and this may increase the already high unemployment figure in the country.
Oil field servicing companies are very strategic in oil production and exploration as they engage in series of activities that culminated in the production of crude oil. They are the ones contracted by oil companies to carry out seismic data activities drilling of oil wells and even construction of oil and gas pipelines among others
A Rystad Energy analysis reveals that stocks in OFS companies have collectively lost half their value since the beginning of 2020.
Analysing a representative group of 116 listed OFS companies, accounting for around 71percent of the traded equities in the sector in 2019, Rystad Energy found that the firms have lost approximately 49percentof their market capitalization since the beginning of this year.
The best performers among service companies were in the Engineering, Procurement, Construction and Installation (EPCI) sector, which only saw market capitalization drop by 27percentcompared to the value erosion of between 39percent and 54 per cent for most other service segments. The most affected stocks were in offshore drilling, a segment that has nosedived by about 80percent since the beginning of this year.
“In a nutshell, our analysis indicates that companies with exposure to EPCI, facility leasing, maintenance and inspection services, SURF or subsea equipment have been less punished by investors, who have prioritized limiting their exposure to well services, drillers, acquisition contract seismic and the North American market,“says Rystad Energy senior energy service analyst Binny Bagga.
Another general trend is that share prices of companies that have consistently paid dividends/distributions over the past years have dropped less than non-dividend-paying companies.
One explanation for the EPCI performance is that a significant proportion of EPCI company revenues stems from industries outside of the oil and gas sector. Another respite for the EPCI segment is that the average contract cycle time is longer than for most other segments, which means that these companies are more likely to be busy with existing projects even if new sanctioning activity is low.
The second-best-performing service segment consists of companies with multi-segment operations, and three elements stand out in particular here. First, this segment index is positively impacted by largecap companies, especially those with significant exposure to EPCI, facility leasing, inspection and maintenance services. Most of the better-performing names also have diversified geographical exposure.
The index performance, in general, is negatively impacted by companies dependent on North American well services. Lastly, about half of the companies in this service segment index have consistently paid dividends over the past three years. Most of these companies have been rewarded with a better share price performance or less market value erosion compared to non-dividend-paying companies.
In the seismic and G&G service segment index, around three-quarters of the companies have seen their market cap erode by more than 60 per cent this year. This segment is highly vulnerable to exploration cost cuts by E&P operators, and to complicate matters further the segment’s average contract recycle duration is around two years.
The plight of well services companies with strong exposure to the North American (NAM) region is well known in the market. More than half of the companies in our NAM well services index have had market cap erosion of more than 60 per cent this year, with some players slumping more than 80percent. Overall this segment is plagued by little service differentiation, which is expected to have a profound impact on pricing and utilization as E&P operators continue to slash their budgets.
The story is much the same for onshore drillers. Many offshore drillers, the worstperforming service segment, are in the process of exploring financial restructuring options, while some of the others have engaged in share repurchase options to shore up stock prices.
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