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Oil service groups are feeling the pressure of slowing activity in the U.S. shale play as companies scale back oil and gas drilling.
The world’s largest oil service providers, responsible for the industry’s heavy lifting, from drilling wells to building roads, this week reported falling North American revenues amid falling demand.
“During the second quarter, we saw a reduction in fracking activity which resulted in an increase in white spaces in our schedule,” Liberty Energy chief executive Chris Wright said in a call with analysts.
Wright added that Denver-based Liberty, one of the nation’s largest suppliers of hydraulic fracturing equipment used to blast shale rock, could reduce its number of fracking fleets in the second half “if our customers’ scheduled work reductions become more significant.”
The slump in business for oilfield service providers — seen as an indicator of the health of the oil and gas industry — is the latest sign of slowing activity in U.S. energy hubs that stretch from West Texas to North Dakota.
The tally of rigs and fracking crews on the ground has dropped steadily since late last year. Equipment has been unloaded at knockdown prices and a recent survey by the Dallas Federal Reserve reported the weakest sentiment since the depths of the coronavirus pandemic.
Each of the big three international oil services groups – SLB, Baker Hughes and Halliburton – this week reported a slowdown in their North American business during the second quarter.
Halliburton, which has the most exposure of the three to the U.S. onshore market, saw its North American revenue contract 2% due to a drop in hydraulic fracturing activity, despite a strong offshore market in the Gulf of Mexico.
“The environment in North America has stabilized and we are hearing some customers asking for discounts, especially in more commoditized markets like pressure pumping,” said Lorenzo Simonelli, general manager of Baker Hughes.
The slowdown comes as many of the exuberant private operators that have driven increased drilling over the past two years have either been swallowed up by bigger rivals or run out of inventory. Listed groups had already held back as Wall Street imposed a strict regime of capital discipline and demanded that excess cash be returned to shareholders.
The problem has been compounded by low commodity prices. Brent crude settled at just under $80 a barrel on Friday, down more than a third from a year ago. Gas prices in the United States, meanwhile, have plunged from more than $6 per million British thermal units a year ago to less than $3.
“You had this double whammy of slower private operator growth coupled with weaker gas markets that ultimately drove down the number of rigs,” said Jim Rollyson, an analyst at Raymond James.
Service groups are betting on rising international and offshore demand to offset the decline in shale slabs. SLB, which does about 20% of its business in North America after offloading the bulk of its hydraulic fracturing business to the United States in 2020, said international momentum was building.
“SLB’s global reach insulates us from regional fluctuations, as we’ve recently seen in North America,” Olivier Le Peuch, chief executive of the company formerly known as Schlumberger, told analysts this week. “We believe that the lack of exposure to large-scale pressure pumping . . . allowed us to continue to grow or cushion another drop in activity.
Halliburton boss Jeff Miller said he expected demand to continue to weaken in the second half, but an anticipated rise in gasoline prices should improve things in 2024.
As U.S. oil production continues to rise, growth is expected to be just 200,000 barrels per day over the next 12 months, well below the 2 million bpd expansion achieved between 2018 and 2019.
With producers promising to stick to their new discipline even if prices rise, the country is hardly expected to return to being the growth juggernaut it became at the height of the shale revolution.
“If you still think global demand for oil is higher in the next few years and the United States isn’t seeing the growth it had before. . . everywhere else has to fill that void,” Rollyson said at Raymond James.
