NEW TECHNOLOGIES ARE HELPING COMPANIES FACILITATE MORE WORK WITH LESS OVERHEAD
CLARK SACKSCHEWSKY, BDO USA, HOUSTON
AS 2016 BEGINS, oil and gas companies continue to grapple with the tumultuous environment that has plagued them throughout this past year, and there is little relief in sight. Oil prices remain depreciated to record levels, clocking in at as low as $37 per barrel, marking a 60% decline from the high in summer 2014.
As oil stores continue to increase and prices continue to plummet, the aftershocks are being felt through every sector of the energy industry. For oilfield services companies providing critical equipment, infrastructure, and services needed to extract and transport oil, the impact is especially deep. For example, Paal Kibsgaard, CEO of Schlumberger, told analysts in October that he did not expect drilling activity to recover before 2017. Amid fewer available projects and increased competition, many services companies are undertaking myriad strategies in an attempt to hunker down and ride out the storm.
HOW ARE OFS COMPANIES NAVIGATING THE DOWN MARKET?
To help weather the current market and to protect themselves from the stagnant oil outlook predicted for 2016, oilfield services companies are rapidly trimming down. Many oil companies are cutting their budgets by 10% to 15%, and these cuts will trickle to down to service company cuts as well. By decreasing spending and considerably limiting cash flow, companies are attempting to keep their assets close and reduce overhead costs. Bloomberg estimates that there have already been more than $6.5 billion in write-downs related to the price crash, and this number is likely to grow throughout the coming year. The Wall Street Journal has characterized company executives as believing that "no cut is too small" in the current environment, referencing some services companies utilizing white rather than colored paint for their underwater equipment in an attempt to lessen expenses.
In addition to tightening their belts, many oilfield services companies are levering any tactics available to reduce their liabilities and exposure to risk. For example, Halliburton is investing in new technologies aimed at reducing the capital, labor and maintenance needed to sustain rig operations in order to facilitate more work with less overhead. Some companies are also prioritizing customer retention by offering current clients deep discounts to encourage them to uphold and renew lucrative contracts. While large firms may not get to this point, many middle market services companies have little choice but to concede to discount demands in order to stay afloat. All of these measures are helping companies cushion their balance sheets during lean times.
As a last resort, many companies are shutting down lines across the country. A recent Forbes article reports that more than 1,100 rig operations have been halted since the price downturn. According to a recent iteration of Baker Hughes' weekly rig count, as of November 25, the count was down to 744, a total reduction of 1,173 since November 2014. As a consequence of the continued collapse of the US oil rig count, layoffs are becoming increasingly commonplace. In October, Schlumberger announced another round of massive layoffs, bringing its total reduction in workers over the past year to more than 15% of its total staff. One of its major competitors, Halliburton, has downsized close to 18,000 employees.
WHAT DOES THE FUTURE HOLD FOR OFS COMPANIES?
Despite all of the challenging forces at play, oilfield services companies can still remain hopeful. Those companies that have strong balance sheets, and those that are taking some of the bold measures mentioned here, should be able to wait out the downturn until commodities prices rebound. And there is reason to believe that they will - the 2009 oil bust turned around remarkably quickly, and while it's already obvious we can't expect the same speedy rebound this time around, demand is likely to increase again and rig activity should pick up in response. Also, as many firms begin to cut their capital expenditure budgets and reduce operations and exploration, supply will decrease, which should help prices recover, as well.
The industry may also expect to see boom and bust cycles continue to shorten, and as companies adjust to this new dynamic, they may be better positioned to withstand future downturns. Oilfield services companies that survive until the market normalizes will come out on the other side leaner, shrewder, and more efficient because of the measures they are taking today. This is already proving true for several operators partnering with start-up FlexGen, which developed a hybrid system that plugs into existing generators to convert and store energy from multiple sources while limiting expenses and maintenance.
Those companies that are having a harder time have some available options, as well. Since the market downturn, a crop of new buyers has sprung up, ready to buy out struggling oilfield services companies. Most of these buyers are private equity funds, including both large and middle-market funds.
There is also a section of funds that has been set up specifically to take advantage of the oil price environment. For example, Massachusetts-based Intervale Capital has brought its total amount of funds raised to $1.3 billion by systematically investing in oilfield services companies across the United States. M&A is also an available option, but realistically, only for companies that are large and profitable enough to attract these deals, such as the highly anticipated acquisition of Baker Hughes by Halliburton. While this deal is estimated to provide Halliburton with $2 billion in synergies, it will also saddle them with $7.5 billion in Baker's debt.
THE BOTTOM LINE
There are many reasons to hope that oil prices will bounce back. The shortening boom and bust cycle offers optimism that prices will rebound, but it also means that oilfield services companies will likely face this taxing situation again in the future. Companies should be smart about their allocation of resources and continue to cut costs and seek to mitigate risk in order to increase their stability. They should also focus on core competencies and efficiencies to carry their businesses through lean times and to combat the inevitable ups and downs of the industry.
The best-run oilfield services companies will view the current condition of the marketplace as an opportunity to improve structures and processes. Despite continued volatility, the good news is that the oilfield services sector is developing innovative ways to increase efficiencies, cut costs, become more nimble, and plan ahead for the next inevitable downturn.
ABOUT THE AUTHOR
Clark Sackschewsky is tax principal and a member of the Natural Resources practice at BDO USA LLP. He can be reached at [email protected].
