U.S. Oil Industry Welcomes Cyclical Inflection After 2 Years of Contraction

U.S. Oilfield Service welcomes inflection after 2 years of contraction

Oilfield service firms have been through the wringer for the past two years. That is changing now, and it is changing fast.

Where We’ve Been

Companies in the oilfield service and drilling sector of the oil industry have been hit the hardest by the recent oil price collapse.

Oil producers are the customers of these firms, and the producers reacted to the commodity collapse by cutting their investment spending for two years straight. This is the first multi-year contraction in industry investment since the 1980’s.[1]

This Schlumberger presentation slide we identified using AlphaSense best illustrates the recent decline. Exploration and production (E&P) capital expenditure (CapEx) sets the addressable market for the vast oilfield supply chain, including oilfield service and drilling firms.

E&P Industry Macro

The pain has been disproportionately felt in the U.S., where the shorter cycle nature of shale drilling resulted in swift, deep cutbacks.

U.S. oilfield service firms are some of the largest employers in oil and gas, and their headcount reductions since 2014 show how producer spending cuts have impacted operational scale.

We used AlphaSense search filters to quickly identify oilfield employment trends during the downturn. This chart shows deeper cuts in the land drilling and mid-sized oilfield service segments, which are weighted towards U.S. shale activity.

Representative oilfield head count reductions

The 9 oilfield service and drilling firms we examined for this analysis employed a total of 103,000 workers prior to the collapse of oil prices in 2014. Since then, they’ve laid off 48,000 workers, cutting staff by an average of 47%.

Similar percentage cuts have been made by many other public and private companies in the industry. More than 350,000 jobs are thought to have been lost across the industry.[2]

Where We’re Going

During 2016, most oilfield health metrics reached cyclical bottom.

Oil prices have bounced off February lows, and hope has returned for some commodity price stability in the $50 – $60 per barrel price range following an important OPEC decision to support prices this past November.[3][4]

U.S. rig count has been improving since May, and the sharpest rebound in history is underway as we write. And yes, oilfield companies are finally hiring again.[5][6]

The topic of “cyclical inflection” is beginning to dominate the oilfield conversation now — a welcome relief. Oil executives are shifting their organizations into growth mode in preparation for the recovery ahead.

We took advantage of AlphaSense Smart Synonyms to automatically expand our search to create an industry sentiment indicator based on the frequency of executive references to “growth” (and related synonyms) during quarterly conference calls.

Shale executive sentiment index - oilfield service is changing

The most interesting thing about this chart is the recent divergence between industry sentiment and oil prices. Sentiment has recovered to about 89% of past peak levels, while oil prices are still down 50% from their highest point. The last time executives spoke about growth this frequently, oil was trading at $100 per barrel.

On the way down, sentiment was closely correlated with oil prices. But now, we are seeing a priceless recovery in executive tone.

We believe this shows that oilfield companies are adapting to the new oil price paradigm. The shale industry has found ways to grow profitably again with oil priced at just $50 per barrel (or at least they believe they have).

Efficiency gains during the downturn help explain their renewed optimism. This sentiment indicator built with AlphaSense quantifies a leading indicator for recovering activity — executive psychology drives cyclical inflection points in oilfield activity.

There is no question that the U.S. oilfield recovery is in process. The only question that remains now is how much room there is to grow. We hope to see answers to that question in 2017.

Index Methodology

We ran 55 conference call transcripts from five handpicked shale companies through a search on AlphaSense for “growth.” We then counted the “growth” hits identified by AlphaSense each quarter.

The totals were indexed to 100 at the peak, and we observed an acceptable level of fit to the average for each company studied.

Indexing neutralized the baseline of observations unrelated to sentiment.

Joseph Triepke is the founder of InfillThinking.com, an independent oil and gas business research firm. Prior to launching Infill Thinking, Joseph was an equity research analyst covering the energy industry for large buy-side and sell-side institutions.

1. E&P CapEx: First Double Dip Since ‘86
2. After 2 Years of Layoffs, Companies Struggle to Find Qualified Staff
3. Bloomberg Oil Price History
4. OPEC Confounds Skeptics, Agrees to First Oil Cuts in 8 Years
5. The Sharpest Drilling Rebound In US History Is Happening Right Now
6. The O&G Job Creation Engine Is Firing Again

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