Overseas drilling boom lifts oil services providers

The biggest oil services providers are shrugging off near-term headwinds from demand uncertainty and rising geopolitical tensions in growing anticipation that the international and offshore drilling boom has years to run.

SLB, formerly known as Schlumberger, and Halliburton are reaping the benefits of an ongoing shift to overseas growth that is more than compensating for a slowdown in North America. A recent wave of consolidation in the US shale patch — led by ExxonMobil and Chevron — that will result in fewer but larger producers further makes the case for international expansion.

But like their oil producer customers, oil services firms have largely kept a lid on spending after emerging from the pandemic, avoiding a large build-out of new equipment to maintain pricing power. Bumper cash flows — as orders surge from offshore producers, along with Middle Eastern and Asian national oil companies — are also helping to boost shareholder returns, with SLB and Halliburton raising their quarterly dividends by 10pc and 6pc, respectively.

SLB, the world's largest drilling contractor, sees the potential for more than $100bn in global offshore investment decisions this year and next. The firm reported its highest ever revenue from the Middle East last year, and says long-cycle investment in the region's offshore and gas sectors remains decoupled from short-term pricing. "Although geopolitical tensions persist in several regions, we do not expect any significant impact to activity in 2024, absent further escalation," chief executive Olivier Le Peuch says.

SLB sees its international revenue growth in the "mid-teens" as a percentage, led by the Middle East and Asia, as well as Europe and Africa. Activity has moderated in North America, but the firm still expects "mid-single digit" revenue growth, bolstered by its technology portfolio in the US onshore and Gulf of Mexico.

Halliburton chief executive Jeff Miller is similarly confident that the fundamentals for oil services remain strong, in part because of an increase in service intensity in its markets. "Whether it's longer laterals in North America, smaller and more complex reservoirs in mature fields, or offshore deep water, customers require more services to develop their resources, not fewer," Miller says.

Halliburton expects oil companies to lift international spending at a "low double-digit pace" in 2024, with multiple years of sustained growth ahead. In North America, the biggest provider of fracking services predicts that stable activity levels and the nature of its contracts will keep revenue and margins steady.

Simonelli says

It was left to Baker Hughes to inject a note of caution, with the firm's chief executive, Lorenzo Simonelli, warning that demand growth remains the "biggest unknown" this year. On the supply side, the key risk is that non-Opec+ production growth will outpace demand, forcing the Opec+ producer group to maintain its output cuts, which will "likely have some influence on upstream development plans", Simonelli says.

Baker Hughes has scaled back its expectations for growth in overseas spending on drilling and well completions to a "high single-digit" range for this year. And the company says there will be no "meaningful recovery" in activity in North America in the first half of the year. "The combination of a volatile commodity price environment, sector consolidation and the inherent elasticity of shale versus conventional developments are all factors contributing to the slower ramp-up in activity," Simonelli says. An added concern for Baker Hughes, which has become a leading provider of equipment to the LNG industry in recent years, is the potential for delays to permitting for new US LNG projects.

By Stephen Cunningham