Oil field service sector sees drilling revival

A looming recession and volatile crude markets have left the top oil field service companies unfazed, in a sign of renewed confidence that the world is in the early stages of a multi-year drilling boom.

Years of underinvestment have strained supplies at a time when Europe is in the middle of an energy crisis as nations scramble to secure alternative supplies as a result of sanctions on Russia. The service sector matched the capital discipline of upstream producers coming out of the pandemic, with build-out of new equipment throttled back even as demand accelerates across the world.

As a result, executives from SLB — formerly known as Schlumberger — Halliburton and Baker Hughes gave an upbeat assessment when asked on recent earnings calls how long the current spending cycle would last. At the same time as demand for their services is increasing, a lack of spare capacity is helping them to regain pricing power. "Macroeconomic headwinds may persist, but energy security and overall global oil and gas supply challenges have created a sustained undersupply situation," US bank Wells Fargo analyst Roger Read says. This combination "should sustain commodity prices and upstream investment".

Halliburton, the biggest provider of hydraulic fracturing services, says that years of increased investment will be needed to meet growing demand. "The effective solution to short supply is conventional and unconventional, deepwater and shallow-water, new and existing development and short and long-cycle barrels," chief executive Jeff Miller argues. "All of it."

The North American market remains "extremely tight" heading into 2023 because of a lack of spare equipment, according to Halliburton. "We remain sold out through the end of the year and into next year," Miller says. And supply-chain bottlenecks that have plagued the industry over the past year are unlikely to be resolved any time soon. Looking further afield, Halliburton expects to see the strongest growth coming from the Middle East, led by Saudi Arabia and then the UAE, Qatar, Iraq and Kuwait. Brazil and Guyana will also see increased activity.

Baker Hughes forecasts double-digit international growth in 2023, as well as modest US growth led by public operators. Meanwhile, the outlook for LNG projects has become more challenging for some independent developers, mainly owing to costs and supply-chain snags, chief executive Lorenzo Simonelli says. More established LNG companies may be better placed to handle those pressures.

Lock and load

SLB raised its full-year capital spending forecast by 10pc to $2.2bn, reflecting the robust outlook. The firm expects to report fourth-quarter revenue growth "in the mid-20s" per cent compared with a year ago. Chief executive Olivier Le Peuch is also counting on growth from the Middle East, a region he believes will benefit from the "largest investment cycle we have seen". SLB's international revenue exceeded third-quarter 2019 levels, on a rig count that is still about 25pc lower than in 2019. "This comparison highlights the significant gains we have made in strengthening our market participation and our continued growth potential as rigs mobilise internationally in the quarters to come," Le Peuch says.

Baker Hughes and SLB welcomed the recently-passed Inflation Reduction Act, which boosted credits for clean-energy technologies. The legislation "should be particularly impactful in accelerating the development of green hydrogen, CCUS [carbon capture, utilisation and storage] and direct air capture", Simonelli says.

Schlumberger's rebranding as a technology company known as SLB comes as the energy industry faces growing pressure to curb emissions. SLB will hold onto its legacy oil and gas business as it helps producers curb their carbon footprints.

By Stephen Cunningham