U.S. Oilfield Market Size Faces Questions After Shaky Start To 2019

The U.S. onshore oilfield service and supply business was a roughly $100bn addressable market in 2018. This figure is the sum of growth capex for the oil and gas producers (E&Ps) that are the customers in this market.

If you work in competitive intelligence for one of the oilfield service firms performing in this space, chances are pretty high that you’ve recently been asked to provide insight on where E&P capex might go in 2019.

The macro volatility and crude oil price collapse in late 2018 rocked the boat during oil producer budget planning season. Now, E&P spending is a fast-moving target as the new year gets underway – more than any year in recent memory.

Following the oilfield market

The oil business is highly cyclical. That $100bn addressable oilfield market figure can easily swing by 20-30 percent year-over-year. Staying at the cutting edge of budget changes is absolutely critical for market intel teams.

Tapping into AlphaSense’s AI-augmented insights can help ensure companies don’t miss an important budget announcement or a critical hint made by a major customer that can swing the addressable market. (Remember, some of the biggest spenders in this marketplace account for 3-7 percent of the total spend.)

Using AlphaSense, we discovered that about 35 percent of customers in the market (by spending) have provided public capex budget guidance as of late January. These announced budgets add up to a 1.5 percent increase year-over-year in 2019.

That’s where things stand now – the starting point baseline, if you will. But the 2019 market size picture is still extremely dynamic. More likely than not, the year will finish with a different story than these early budgets indicate. Keeping up with oil producers’ body language is also important, and that’s where we turn our attention next.

Oil producers stand ready to cut budgets in early 2019

The nuanced management commentary accompanying these the early investment plan announcements for 2019 are just as important as the numbers. In December 2018, management teams often couched their 2019 budget discussions as “preliminary.”

The underlying tone of management commentary can inform a view of revision risk. So in addition to collecting the figures, thematic queries are also extremely important.

Searching “capex” across U.S. oil producers and reading the commentary around these excerpts paints a picture of uncertainty.

Here are a couple examples:

Parsley Energy’s $1.5bn 2019 budget was accompanied by this qualifying statement:

“In the event of incremental and sustained oil price weakness, we have the operational flexibility to slow activity further…”

Oilfield Market Capex Trends

Meanwhile, WPX qualified their $1.6bn spending program saying that if oil is $50-$55/bbl then “we need to peel some capital back.” (AlphaSense users can log in to view full transcript)

“It just depends on the timing and then is that really a $50 or is that $55, and how we work through that.”

On top off fluctuation, structural winds of change are blowing

Challenged by Wall Street in 2017 and 2018, the U.S. oil producer mindset has shifted from growth for growth’s sake to prioritizing cash flow and returns.

A thematic AlphaSense search of “capital discipline” across transcripts in the exploration/production industries is a good way to get a sense of changing capital objectives in shale:

Oilfield Market Size

Industry focus on capital discipline has surged in the recent past. This signals the industry’s newfound sensitivity to living within cash flow. This is a factor that could make budgets less resistant to commodity price declines.

This mindset change is factoring heavily into 2019 budget calculus. If oil prices fall, it may catalyze larger-than-normal spending program reductions than we’ve seen in the past, as operators strive to spend within cash flow.

2019 budgets should be closely monitored all year

Despite the newfound capital discipline in shale, 2018 was a historic year for U.S. oil production growth. Oil producer capex budgets in 2019 will be key to determining if that growth is repeatable. It will also help define the addressable market for the many oilfield suppliers that work in this dynamic marketplace.

Oilfield Market Capex Trend

Everyone will have to wait and see what oil prices give producers throughout the year. Time will tell if “preliminary” 2019 spending programs turn into actual dollars spent. If your business is subject to E&P capex swings, keeping up with the latest budget changes will be critical to managing any potential turbulence.

Joseph Triepke is Founder and Principal Research Analyst at InfillThinking.com, an oilfield market information firm. Previously, he was a publishing sellside analyst and a buyside analyst working on oilfield service names for firms including Citadel, Guggenheim, and Jefferies. He majored in finance at the University of Texas at Austin.

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