Citadel Survey: Oil, gas service firms asked to cut prices

Citadel Advisory Group, a boutique investment banking firm serving oil and gas related industries, recently surveyed oil and gas service companies to understand where clients stand financially within current oil prices.
By Emily Aasand | April 06, 2015

Citadel Advisory Group, a boutique investment banking firm serving oil and gas related industries, recently surveyed oil and gas service companies to understand where clients stand financially in the current oil price environment.

The survey, which was open Feb. 4-16. and surveyed owners and C-level executives of more than 500 privately held U.S. and Canadian companies, came to flourish as Citadel began receiving questions, guidance and reassurance about the current oil price market.

“As oil prices declined, we were flooded with calls from our network of service companies, as well as investors, wanting insight from their peer group,” said Chris Frevert, managing director of Citadel. “Executives wanted guidance; some just sought reassurance.”

Citadel found that 92 percent of respondents indicated their top customer has recently requested price reductions in an effort to counter falling oil prices. Of those, roughly 12 percent shared that rate reductions topping 25 percent were requested from their top three customers. The data showed the negotiated reductions were more favorable to the service provider, Citadel said.

“Over the last couple of years, majors have been getting very good at pushing down requirements and work that was once their responsibility on support service companies without compensation. Unrealistic concessions are being requested despite relatively low margins,” said one survey respondent.

The survey also found that more than 26 percent of service providers expected work volume to decrease by more than 25 percent, and nearly 30 percent said its customers have not provided guidance on work volume.

One question asked was “Aside from headcount: Which of the following are you considering in an effort to reduce costs?” Citadel found that more than 32 percent were considering reducing workface pay, while 25 percent were not considering any other reductions. Other reductions companies are considering include: Changes to benefit programs (7.1 percent), reduction in number or size of locations (7.1 percent), sale of assets (8.9 percent), reduction or change in service line (7.1 percent) and other reductions (12.5 percent).

Another question asked was “In your opinion, where do you anticipate the price of WTI to be on June 30, 2015?” Citadel reported that more than 50 percent of respondents believe the price will be between $56 and $65 per barrel, and nearly 30 percent believe the price will range between $46 and $55 per barrel.

Of those surveyed, 14.6 percent said the Bakken was responsible for the largest percentage of its revenue, which comes in third only to the Niobrara and Powder River Basin (31.7 percent) and the Eagle Ford shale play (17.1 percent).  And of the segment of the oil and gas stream that represents the largest percentage of business, 19.5 percent responded with drilling, 39 percent said completions, 29.3 percent said production, 7.3 percent responded with midstream (pipeline) and 4.9 percent said other.

Frevert said that comments by respondents provided insight into how the industry feels about declining oil prices. Comments ranged from equipment managers saying, “If drilling activity does not pick up soon then it will be a very rough Q2 and could be a devastating second half of 2015 for manufacturing companies in the oil and gas sector,” to technical service providers saying, “We’ve had our second best month ever in January and February will be good as well. We are concerned we won’t have the equipment to handle the work load or the personnel for field installs.”