Prospects for the global oilfield services and drilling sector (OFS) have turned the corner and now appear to have stabilized after a stretch of severe demand and price erosion.
"The stable outlook for the global OFS sector reflects our view that the worst is now behind us and we are in the early stages of a cyclical recovery," said Moody's analyst Sajjad Alam. "After a weak 2016, we expect industry earnings to grow 6% to 8% in 2017 and more substantially next year, given improved prospects for commodity prices and higher upstream spending."
In North America, exploration and production companies are expected to spend 25% to 30% more this year, while overall global upstream spending should grow by mid-single-digit percentages, leading to rising revenues, Alam said. But substantial cash flow growth won’t be seen until 2018, as global oil markets continue to slowly rebalance and OFS pricing only modestly improves, Moody’s said.
Also, some markets will continue to suffer further revenue and EBITDA declines, analysts said. “Many companies have to cover significant reactivation costs, rising labor costs and increasing working capital demands during the early phases of recovery,” Alam said. Demand is expected to grow mostly in U.S. and Canadian land markets, where activity contracted most significantly during the downturn. “Completion-related services will see the highest price appreciation, though cash flows will still grow only modestly this year.”
Drilling efficiency and well productivity improvements are expected to slow rig additions this year, as the U.S. rig count will likely settle around 1,000 rigs, Moody’s said. Rig counts in international land markets are also expected to slow through mid-2018.
For offshore projects, near-term prospects remain challenged as major deepwater/ultradeepwater development is unlikely to be green-lighted until oil prices rise above $60 per barrel, analysts said. “Revenues and backlogs for offshore drillers, equipment manufacturers and logistics companies will continue to decline as customers offer low-margin contracts, or avoid contracts altogether, while overcapacity in the offshore segment takes several years yet to clear.”
– Nicholas Stern, managing editor