As shale bounces back, ser­vices firms ain’t feel­ing the re­cov­ery

The National - News - Business - - Analysis - Liz Hamp­ton

Oil ser­vices com­pa­nies in the United States have been do­ing a lot more work as re­cov­er­ing oil prices have lifted the shale in­dus­try out of a two-year slump – but pro­duc­ers have been pock­et­ing much of the new cash by rais­ing out­put and squeez­ing ser­vice providers to keep costs down.

Oil ser­vice com­pa­nies that pro­vide the crews and tech­nol­ogy used to drill, con­struct and op­er­ate wells are lag­ging the re­cov­ery in US 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. The law firm Haynes and Boone said the US oil­field sec­tor ex­pe­ri­enced 127 bank­rupt­cies be­tween 2015 and April 2017.

Among the 10 largest 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, the chief ex­ec­u­tive of Hal­libur­ton, 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 oil­fields.

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. Shale com­pa­nies 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 US$26 per bar­rel nadir of Fe­bru­ary 2016. But it left ser­vices com­pa­nies with­out a way to im­me­di­ately ben­e­fit from the US crude bench­mark’s re­turn to about $50 per 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, 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, 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 per cent 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, which plans to drill about 250 wells this year in the Per­mian Basin, is look­ing to tie what it pays for ser­vices to the US crude bench­mark – con­vert­ing fixed-ser­vice costs to a vari­able cost 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 is ty­ing some of its con­tracts to in­dexes to re­main com­pet­i­tive. Michael Be­hounek, a se­nior drilling ad­viser for Apache, said this month at a drilling con­fer­ence in Hous­ton that ser­vice com­pa­nies “don’t want to ride the roller coaster ei­ther. If we go down this route, it might be good for both par­ties.”

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