Are better times ahead for oilfield services?

By Patrick C. Miller | April 17, 2018

Oil prices remaining above expected levels in early 2018 is good news for the oilfield services (OFS) and equipment sector, according to a new report from McKinsey Energy Insights.

Titled “Recovery continues in the OFS sector, but margins stay under pressure,” the report was authored by Mikhil Ati, Marcel Brinkman, Ryan Peacock and Clint Wood for McKinsey & Co. Energy Insights, a global market intelligence and energy analytics firm headquartered in London.

McKinsey forecasts Brent crude to be priced at around $55 a barrel by the end of 2018 and noted that “several majors have said they expect prices to fall over the next few months, which is keeping them cautious, especially on projects with longer lead times away from U.S. shale.”

The report stated that while oil prices have remained higher than expected during 2018, margins and shareholder returns in the OFS sector were less impressive—except for large, integrated service companies such as Schlumberger, Halliburton and Baker Hughes.

“This is largely down to operators lowering the bar on project costs, as a condition of raising capital expenditures,” the report explained, further adding that U.S. onshore margins remain under pressure.

According to the report, rapid innovation appears to be driving down costs faster than expected for onshore oil and gas operations. This is boosting recoverable resources and lowering the oil price needed to trigger an increase in U.S. crude production. It’s also had the effect of constraining revenue and margin growth for oilfield service providers.

“This should be enough to support activity in the oilfield services and equipment (OFS) sector going forward,” the report said. “However, the impact may not be universal, with the latest indications suggesting the higher prices have prompted a surge in U.S. onshore output, which could mean less activity elsewhere, especially offshore.”

EIA currently estimates U.S. production at about 10.3 million barrels per day, significantly above the previous production record of 9.7 million barrels per day set in 1970. By the end of the year, EIA forecasts U.S. production to be above 11 million barrels per day, surpassing Russia’s 10.95 million bpd and making the U.S. the world’s biggest oil producer.

“Strong investment growth in the U.S. onshore in the first half of 2017 has begun to pick up again after easing a little in late Q3, while the depressed conventional and offshore sectors are beginning to see signs of recovery,” the McKinsey report said.