Halliburton is emphasizing a return on capital approach, and has stacked additional equipment in 2Q where returns were not justified, and expects activity down in [North America] in 3Q,” Morgan Stanley wrote in a note.
In an earnings call with analysts and shareholders on Monday, Halliburton CEO Jeff Miller laid out a few strategies in response to the weak shale market. The company has slashed capex by 20 percent as demand for its services has slowed. “We have sufficient size and scale in this market and see no reason to invest in growth when it comes at the expense of returns,” Miller said.
Also, Halliburton is “removing several layers of management.” Finally, the company has “stacked” – or removed – unused equipment “throughout the quarter and will continue to do so where we do not see acceptable returns,” Miller said. “The pressure pumping market remains oversupplied and we're not afraid to reduce our fleet size, as it contributes to righting the supply and demand imbalance.”
On the call, analysts seemed to approve of the measures. “Kudos for being proactive on stacking equipment in this market versus fighting for share,” Angie Sedita of Goldman Sachs said to Halliburton CEO Jeff Miller.
Last week, Schlumberger, the world’s largest oilfield services company, also relayed its experience with the slowing shale market. “North America land remains a challenging environment,” Olivier Le Peuch, Chief Operating Officer and soon-to-be CEO of Schlumberger, said in an earnings call on July 19. “Indeed, the E&P operator focus on cash flow has capped activity, and continued efficiency improvements have also reduced the number of active rigs and frac fleets, so far without major impact on oil production.”
For the oilfield services companies, it wasn’t all bad news. Drilling activity was up in other parts of the world, compensating for the decline in U.S. shale. The rather downbeat comments about U.S. shale stood in sharp contrast to how Schlumberger saw the international market, which the company says is in the midst of “broad-based activity growth.” Schlumberger’s Le Peuch noted that “as offshore momentum builds, shallow-water rig activity grew by 14%” in the second quarter, and whether in Latin America, Europe, Africa or Central Asia, the oilfield services giant saw strong growth.
In other words, the oilfield services company had a dramatically different experience in the shale patch compared to elsewhere. “At the close of the first half of 2019, international revenue has increased 8% year-over-year, while North America land revenue has declined 12% year-over-year,” Le Peuch said.
Outgoing Schlumberger CEO Paal Kibsgaard expanded on these themes in the conference call with analysts and shareholders. He said that U.S. shale is one of the few sources of supply growth, but “the consolidation among North American E&P companies is further strengthening the shift away from growth focus towards financial discipline.”
Globally, Kibsgaard said that sources of new supply will “start to fade in 2020,” thereby tightening up the market. In the meantime, “the cash flow focus amongst the E&P operators confirms our expectations of a 10% decline in North America land investments in 2019,” he said.
“This means the welcome return of a familiar opportunity set for Schlumberger,” Kibsgaard said. “For the first time since 2012 and 2013, we see high and single-digit growth in the international markets, signaling the start of an overdue and much needed multi-year international growth cycle.”
It’s a role reversal from just a few years ago, when capital flowed into Texas and North Dakota when drilling was growing at a torrid pace. At the time, global drilling activity outside of North America was depressed.
Meanwhile, a few other indicators also point to stress in the shale industry. The backlog of drilled but uncompleted wells (DUCs) has declined for the fourth straight month in June, which analysts view as a sign that drillers are resorting to a strategy of completing their already-drilled inventor as a way growing production while keeping a lid on costs. “They have already sunk their cash into the drilling portion,” Elisabeth Murphy, an analyst at ESAI Energy LLC., told Bloomberg last week. “Now it’s just a matter of completing rather than drilling new wells.”
However, new satellite data from data firm Kayrros finds that the number of DUCs is likely vastly smaller than public data suggests. Even more damning is that the number of wells completed last year might have been much higher than previously thought, which suggests that the industry needs more wells than expected to produce as much as they are.
Kayrros said that according to satellite data, “more than 1,100 wells were completed in the Permian basin but not reported through state commissions or FracFocus, a public repository for information on the chemicals used during fracking,” Kayrros said in a statement. “Kayrros measurements reveal that public data fail to capture the full scale of fracking. The macroeconomic implications of this underreporting are far-reaching.”
Because it takes many more wells to produce the current volume of oil, “the average well is both less productive and higher-cost than reflected in public data,” Kayrros said.
Andrew Gould, former Chairman of BG and Chairman CEO of Schlumberger and Kayrros advisory board chairman, put it bluntly: “With far more wells contributing to Permian and US oil production than accounted for, current shale oil production is substantially more water- and sand-intensive than is commonly believed,” he said in a press release.