2015 was a difficult year for the oilfield services sector, with the number of land-based drilling rigs dropping by roughly 60 percent in the face of continued commodity price. As Exploration and Production (E&P) firms clamor to prepare for reserve-based borrowing resets in the spring season (“redeterminations”), they will be dealing with debt providers that are already reeling with problems and are bracing for more to come.
In 2016, we expect the industry to respond with accelerated adoption of cost saving technologies and a focus on optimizing asset portfolios to achieve efficiencies and economies of scale. Creativity, cost cutting, good negotiating skills and clear forward strategy will help many survive, however an increasingly number of companies will face insolvency, bankruptcy and potential liquidation.
- Persistent lower price decks continue to strain the balance sheets of both E&P and service companies. There is tremendous forward pricing uncertainty in the market, as continued oversupply, record-high storage inventories, and a backlog of drilled and partially completed wells have combined to create a significant overhang. Market forces will eventually right-size the U.S. E&P market by driving highcost production offline, but in the interim, companies are continuing to focus on cash flow/liquidity optimization and expanding or maintaining margins via operating efficiencies.
- Further downstream, cuts in drilling activity and stagnant U.S. production levels have challenged the transportation and logistics sectors. Oilfield trucking companies have seen dramatic reductions in activity and have had limited success transitioning into other sectors, as record levels of inventory economy-wide are dampening demand for trucking services. Crude tankers, in contrast, saw a relatively strong 2015, as offshore storage capacity needs related to the supply glut caused a fourthquarter spike in rates. In 2016, this trend could soften, as carriers from other sectors are attracted to the commodity market by high rates.
- As E&P operators seek cost savings, drone usage in the oilfield is on the rise. Drones are increasingly being utilized to safely and efficiently perform inspections and to gather time-sensitive information. As the regulatory environment for unmanned aerial vehicles becomes clearer, drone usage is expected to rise significantly.
- Sand producers have seen their combined EV drop percent since Q2 2014 as drilling activity has stalled and rigs have been laid down. In response producers have idled their highest-cost production, worked to optimize logistics, and expanded into higher-margin resin-coated sands.
- Adoption of operational technologies like GIS and edge computing is driving efficiency improvements and margin expansion for cash-strapped E&P operators. The focus on technological expertise at the wellhead is driving service companies to differentiate their product lines with digital tools and equipment and is causing private equity investment to divert capital to commodity-focused technologies.