Oil field services sees sustained rise in drilling
The oil field service companies that support global oil and gas producers are increasingly confident that the current drilling upturn has years to run, buoyed by growing demand from the Middle East and Latin America.
Years of underinvestment that predated the Covid-19 pandemic, renewed concerns over energy security sparked by the Russian invasion of Ukraine, and a commitment to capital discipline have set the stage for a lasting up-cycle, executives said during recent fourth-quarter earnings calls. Despite fears over a looming recession, global demand for oil and gas appears unlikely to wane any time soon. Supplies remain tight, with only modest production growth seen. And, having been forced to slim down in recent years, the service sector is regaining pricing power as its own capacity remains tight.
At the same time, a pivot to international growth — excluding Russia — is paying off, despite a mixed outlook for North America. And shareholders have become the main beneficiaries of surging cash flow. "We are clearly witnessing the start of a new phase in the growth cycle, which will increasingly be delivered by international growth," says Olivier Le Peuch, chief executive of SLB, formerly known as Schlumberger, the world's biggest oil field service contractor.
SLB sees record Middle East upstream investment and robust offshore growth in Latin America and Africa. "The combination of long-cycle oil capacity expansion projects, offshore deepwater resurgence and strong gas development activity will be a key driver for the multi-year duration of this cycle," Le Peuch says. That will support the company's goal to boost revenue by more than 15pc this year.
SLB's main rivals are equally upbeat about overseas prospects. Halliburton expects international activity to grow by at least 15pc this year, also driven by the Middle East and Latin America. Around half of its overall revenue already comes from overseas markets. And Baker Hughes chief executive Lorenzo Simonelli says global spare capacity has deteriorated and so years of investment will be needed to meet future demand. Simonelli forecasts a second year of "solid double-digit increases" in global upstream spending in 2023.
Animated states
As far as North America is concerned, the outlook is more nuanced. Baker Hughes expects activity to remain rangebound for the remainder of the year. "However, we believe that this level of activity, as well as cost inflation, will still translate into North America D&C [drilling and completion] spending growth in the mid to high double digits in 2023," Simonelli says.
SLB sees spending growth in North America slowing after an "exceptionally strong" 2022, with rig counts potentially plateauing. But ExxonMobil, Chevron and BP are still expected to boost shale spending, while drilling activity will be supported by the need to rebuild well inventory. Halliburton chief executive Jeff Miller says North America could surprise on the upside, with customer spending poised to rise by 15pc from last year. Halliburton, the biggest provider of hydraulic fracturing services, cites a tight market for equipment as well as persistent supply-chain shortages. "Our completions calendar is fully booked and pricing continues to improve across all product service lines," Miller says.
Flush with cash, the oil field service firms are copying the producer playbook by focusing on investor returns. SLB aims to return $2bn to shareholders in 2023, after upping its dividend and resuming buy-backs this month. Halliburton aims to return at least 50pc of free cash flow to shareholders. It repurchased $250mn of stock in the fourth quarter. And Baker Hughes pledges to return 60-80pc of free cash flow to shareholders through a combination of dividends and buy-backs.
| Oil service firms' results 2022 | $mn | |||||
| Company | 4Q | 4Q21 | ±% | FY22 | FY21 | ±% |
| Profit | ||||||
| Halliburton | 656 | 824 | -20 | 1,572 | 1,457 | 8 |
| Schlumberger | 1,065 | 601 | 77 | 3,441 | 1,881 | 83 |
| Baker Hughes | 182 | 294 | -38 | -601 | -219 | na |
| Revenue | ||||||
| Halliburton | 5,582 | 4,277 | 31 | 20,297 | 15,295 | 33 |
| Schlumberger | 7,879 | 6,225 | 27 | 28,091 | 22,929 | 23 |
| Baker Hughes | 5,905 | 5,485 | 8 | 21,156 | 20,502 | 3 |
| North America revenue | ||||||
| Halliburton | 2,611 | 1,783 | 46 | 9,597 | 6,371 | 51 |
| Schlumberger | 1,633 | 1,281 | 27 | 5,995 | 4,466 | 34 |
| Baker Hughes | na | na | na | na | na | |
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