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It’s earnings season for the world’s major oil services companies — Halliburton posts results on Tuesday and Baker Hughes will do the same later this week. These are the companies that actually drill and frack wells in places like the Permian Basin, and it’s been a tougher business lately with low oil prices and an oversupplied global market.
Oil services companies do a lot for the Exxons and Chevrons of the world. Like drilling.
“A drilling rig sits out there and helps you drill two miles into the earth. You're putting pipe down that hole, that rig would cost anywhere from between $20 and $40 million,” said Dan Pickering with Pickering Energy Partners.
Rigs run 24/7 and can drill two to four wells per month. Just one employs dozens of people. The companies that own them compete for drilling contracts, so when the market is soft like it is now, they don’t want their high cost equipment gathering dust in some stockyard.
“Therefore pricing gets competed down toward break even, and that's what's been happening for the past year,” Pickering said.
Because of global oversupply, U.S. crude oil has been priced in the high 50s — below the break-even point for a lot of oil companies, said analyst Saurabh Pant with Bank of America.
“A lot of people are not making money at below 60, right? So they're not going to drill, and that's going to show up in the rig count that's going to show up in the revenue for our companies,” he said.
This is more of a North American thing, because of higher break-even points and faster drilling cycles. Companies with big footprints outside the U.S. are in better shape. It can take years to develop new projects, so those firms are less affected by oil price swings, said Gregory Brew with Eurasia Group.
“In some areas, they're not expecting to be dinged quite as badly. In places like Guyana, for instance, activity is likely to remain fairly robust,” he said.
Even in the U.S., there’s still an upside to consider for oil services companies.
“The sentiment on the gas side, particularly in the U.S., is still very strong,” Brew said. “Rig count for gas continues to increase or remain fairly steady, even as the oil rig count falls.”
Companies need to get that natural gas out of the ground to power growing electricity demand — whether it’s shipped abroad via LNG or used in natural gas plants domestically.
