OFS quarterly: Recovery gains pace

December 2017 | Nikhil Ati, Marcel Brinkman, Ryan Peacock, and Clint Wood

A rise in oil prices to two-year highs should further stimulate a recovering OFS sector, despite lower-than-expected activity in US shale.

Quarterly perspective on oilfield services and equipment: December 2017

At the time of writing, front-month Brent had risen to over $63/barrel, which, if consolidated, could mean an activity surge for the oilfield services and equipment (OFS) sector—much of which was already operating profitably in the lower-price environment, due to cost cutting, downsizing, and consolidation. The rapid price rise should also offset concern among some of stalling investment and activity levels in the US onshore sector as we head into the fourth quarter. So far, US onshore activity has been responsible for most of the growth in OFS revenue this year, and the recovery has yet to get going outside North America, with offshore rig counts falling to a new record low in the third quarter. Nevertheless, OFS Q3 revenue jumped by about a fifth from the previous year, building on growth in Q2, although margins remained under pressure.

The Organization of Petroleum Exporting Countries (OPEC) appeared to tighten its grasp on the market in August, with an improvement in quota adherence that has continued into October combined with indications that output restraint could last beyond March of next year. At the same time, strong demand is soaking up oil stocks. Then, in early November, rising tensions in the Middle East, related to political events in Saudi Arabia, turned sentiment more bullish.

While the OPEC-induced price recovery at the end of 2016 proved an opportunity for US producers to lock in prices and invest heavily, most OFS executives have been talking down shale prospects in Q3 earnings calls—although this was before the latest crude rises. Schlumberger CEO Paal Kibsgaard’s comments were typical: “[US shale] production growth is so far falling short of expectations, driven by supply-chain inflation, operational inefficiencies, and the need to step out from the Tier 1 acreage. This has led to a moderate investment appetite, where the previous single-minded pursuit of production growth is now being balanced out with an equal focus on generated solid financial returns and operating within cash flow.” The North American onshore rig count was up another 60 from the previous quarter but has seen a number of falls over recent weeks.

The changing competitive environment has prompted us to alter our OFS categories, splitting Services into two categories: Integrated Services and Services. The first category contains Schlumberger, Halliburton, and Baker Hughes, a GE company, which are able to provide integrated offerings across the OFS spectrum, with Schlumberger and Baker Hughes both combining services and equipment. The remaining Services category is formed by companies with less scale and often a more focused or local presence.

OFS revenue was up for the quarter and the year for all categories—for the first time since the oil price slide began. Margins also rose sharply for the smaller Services companies, and there was even a quarterly improvement for Assets. But the three Integrated Services companies saw little change, despite strong revenue growth, as operators demanded increased operational efficiencies to grow output and lower costs to make money in the low-priced environment. Halliburton’s CEO, Jeff Miller, said his company was working flat out and customers were getting more for less: “Today, the industry is drilling approximately the same footage as in 2014 with half the rigs, while completions intensity has significantly increased. As the rig count stabilizes, our customers are focused on efficiencies, optimization, and making more barrels. ... Our fleet is sold out for the remainder of the year and into 2018.” OFS returns to shareholders were little changed in Q3 but have moved up with the oil price over recent weeks.

In a further development of its strategy, Schlumberger is taking steps beyond OFS and into ownership of upstream oil and gas assets. The new strategy provides Schlumberger access to all the contracts for projects in which it has a stake and is being closely watched as a potential model for the other major oilfield services companies that have plenty of drilling skills but lack business opportunities in some areas. Schlumberger’s investment in a project in Morocco is enabling activity to move forward, generating contracts where there had been none before.


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OFS quarterly: Recovery gains pace

OFS quarterly: Recovery gains pace

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The events laid out above are an abridged version of our quarterly perspective on OFS. Our Q3 perspective includes updates on market development, activity, rig count, and performance. To access the full version, please click the button below.


About the authors

Nikhil Ati is an associate partner in McKinsey's Houston office, where Clint Wood is a partner. Marcel Brinkman is a partner in the London office and leader of McKinsey's oilfield service & equipment service line. Ryan Peacock is the oilfield services manager of McKinsey Energy Insights.