As E&P company executives predicted, a dramatic reduction in rig activity is also chilling oilfield service company prices.
James Crandell, senior analyst for Cowen & Co., said in a Feb. 12 report that 25% of all rigs will be mothballed by the end of the first quarter of 2015 compared to the fourth quarter of 2014.
“This collapse of activity is causing a reduction in drilling costs of as much as 20% as all suppliers of equipment and services in the U.S. lower prices,” Crandell said.
U.S. rig activity in at the end of March could fall to 1,150, compared with 1,456 as of Feb. 6, Crandell said.
E&P companies have made a concerted effort to reduce their capex, some by as much as 70%. WPX Energy Inc. (NYSE: WPX), for instance, said Feb. 12 it would cut spending by 45% compared to 2014. About 70% of the 2015 budget targets liquids plays and production will still grow 15% to 20%.
“All anecdotal information we are getting is that oil companies are being successful in their quest for lower drilling costs,” Crandell said. “In both land rigs and pressure pumping, suppliers are said to be lowering prices by 15% to 20% and in other businesses 5% to 10%. This significantly increases the profitability pressures on the oil service companies but it is necessary if the E&P companies are going to pick up drilling if crude oil gets to $60 per barrel.”
Though many companies might see the bottom of North American margins by the second or third quarter of 2015, international revenues and margins might trend lower through mid-2016 in an environment where international E&P spending is expected to drop by 30% from 2014 to 2016, Crandell said.
Oil volumes and pricing have fallen so greatly that the profitability of large oil service companies will be significant. So far, Crandell said the negative effects on such companies are being underestimated by analysts, investors and the market.
“Our 2015 to 2016 EPS estimates for the large oil service companies have been and we believe still are the lowest on the Street or toward the low end of the range,” Crandell said.
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