Oilfield service market took massive first-quarter hit

The oilfield service (OFS) market took a massive hit in first-quarter earnings, while, despite the COVID-19 outbreak, US shale operators had an impressive quarter and even resulted in increased dividends, according to Rystad Energy analysis.

A preliminary analysis of 204 service companies finds revenues down 6% compared to the same period last year, while impairment charges have skyrocketed.

Profit margins for January through the end of March 2020 were down by almost 90%, and the top 50 public service companies recorded total net losses exceeding $35 billion – far greater than the quarterly losses incurred during the previous industry crisis 5 years ago.

Well servicers and land drillers in the US shale operations saw the greatest revenue decreases, but offshore project delays are taking a toll on service revenues, as well. Share prices, too, have dropped, falling almost 50% since the beginning of the year, with offshore drillers hit especially hard.

“Although the 6% year-on-year fall in 2020 first-quarter revenues appears modest compared to the massive decreases of 30% or more recorded during the last downturn, our analysis indicates that we are witnessing only the beginning. Larger declines are expected in the near term. This is bad news for an industry that still has not fully recovered from the previous crisis,” said Aleksander Erstad, energy service analyst at Rystad Energy.

The worsening market outlook has forced companies to take record impairment losses and asset write-downs. Not only in the OFS sector, which wrote down billions of dollars in assets in the first quarter, but also for E&P operators.

Rystad analyzed first-quarter earnings of a peer group comprising the top 39 public US shale oil producers (excluding majors, gas companies, and Anadarko). Due to mergers, bankruptcy, and delayed filings, the group shrunk to 35 operators fourth-quarter 2019 and to 29 operators in first-quarter 2020.

Despite the worsening market, the sector performed better than expected under the circumstances, Rystad said.

The first-quarter of 2020 showed a surplus of more than $1 billion in cash from operations compared to capital spent during the period, even though the number of operators that managed to balance out dropped back to 45%.

“It’s the fourth consecutive quarter of positive cash balancing, and the fourth-quarter in the history of the shale industry when companies didn’t overspend. This is actually quite impressive, especially for first-quarter results,” said Alisa Lukash, senior shale analyst at Rystad.

Although shale producers generated their worst-ever net quarterly result—with collective losses reaching $26 billion (against a 6-year average net loss of $2.9 billion)—the numbers would be far less ominous if impairments were excluded. The biggest factor pulling results down was the operators’ massive impairment adjustments of $38 billion.

The fair value changes recognized for hedges and derivative financial instruments in first-quarter 2020 income statements amounted to $9.6 billion—the highest since 2014, followed by fourth-quarter 2014 at $9.5 billion, and fourth-quarter 2019 at $9.2 billion.

Dividend payments grew by almost $50 million for the peer group in first-quarter 2020, as operators displayed an effort to shore up plunging equity prices, Rystad said. The ratio of dividends to capex grew to 6.4% in first-quarter 2020 versus 5.6% in fourth-quarter 2019.

At the same time, stock buybacks have predominantly been paused as companies wait for signs of a structural recovery in commodity prices, Rystad said. Stock repurchases dropped by $400 million in first-quarter 2020 for the shale E&Ps, now accounting for 7% of quarterly capex.

The updated outlook on the debt and interest by maturity for public US shale oil producers has reached $140 billion in maturity and payments scheduled through 2026.