Oil service sector tests upstream investment outlook

Investors will be looking to the top three oil field service companies' second-quarter earnings calls this week for signs of whether international upstream drilling activity is set to make up for constrained US production growth.

With US producers under investor pressure to rein in drilling and focus instead on fixing balance sheets and raising returns, the service sector has been looking further afield for growth — a shift that was already under way before last year's Covid-induced crash. Leading service providers are also looking beyond oil by investing in hydrogen and carbon capture technology as they adapt their businesses for the energy transition.

In April, Schlumberger said it expects international upstream activity to strengthen for the rest of this year and into 2022. Baker Hughes cited "greater confidence" in its international outlook for the second half, with prospects looking up in the Middle East, Latin America and Russia. And Halliburton predicted that overseas markets would experience "multiple years of growth". The long-awaited international recovery is finally on the horizon, according to US bank Morgan Stanley, with upstream spending growth set to shift back to Opec+ from other regions such as North America and Latin America. It expects Schlumberger and Halliburton to reiterate double-digit year-on-year growth targets for the second half of 2021.

The sector's prospects have improved somewhat this year after a series of multi-billion dollar write-downs and thousands of job cuts last year. Recent indications are that hiring is slowly picking up again, with the industry adding about 8,000 jobs in June in a fourth straight month of gains, according to trade body the Energy Workforce and Technology Council. Still, the sector has restored only about a fifth of the total jobs lost as a result of the pandemic.

Schlumberger chief executive Olivier Le Peuch last month heralded the potential for a "demand-led supercycle", partly because of expectations that supply and demand will rebalance faster than expected as a result of lower upstream investment. And at the same time that the sector has turned a corner from last year's downturn, inflation concerns have reappeared.

A closely watched energy survey by the Federal Reserve Bank of Dallas shows that an index for input costs among oil field service firms jumped to a record in the second quarter. The index of prices received for services also rose. Morgan Stanley says none of the service companies it has been in contact with over the past month indicated that they are having difficulty passing on higher costs to customers. "This does not mean that all will beat on margins, but it does speak to a tightening supply-demand balance for services," the bank says.

Peak condition

Although Baker Hughes chief executive Lorenzo Simonelli has said his company is committed to "leading in the energy transition", he pours cold water over the suggestion that demand for oil and gas will disappear anytime soon. "We do believe peak oil will occur in years, not decades, but the role of oil and gas will continue to be important for many regions," with renewables unable to scale up quickly enough to meet future energy demand, he told a recent conference.

Baker Hughes recently teamed up with Norway's Borg CO2 on a carbon capture and storage hub that aims to capture up to 90pc of emissions from select industrial sites. It has also taken a 15pc stake in a German start-up that plans to produce synthetic natural gas from CO2 and hydrogen. While Baker Hughes has pledged net zero emissions from its operations by 2050, Schlumberger recently went one step further by vowing to zero out all emissions from across the value chain by the same date, with minimal use of carbon offsets.

By Stephen Cunningham