Barclays Analyst: Oilfield Services Industry Will Be Reinvented by Digital Technology and Data Science

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The North American oilfield services (OFS) industry will continue going through a "painful but necessary correction" for at least another year, but the industry will be reinvented by digital technology and data science that generate significant productivity gains for their clients, oil and gas producers, J. David Anderson, CFA, a senior equity analyst at Barclays Capital (London, England) told energy analysts and bankers in a virtual conference session.

Speaking at the 25th The Oil & Gas Conference organized by EnerCom Incorporated (Denver, Colorado), Anderson said the current downturn in the North American OFS is more structural and dramatic than the changes that followed the crude oil price collapse of 2014-16. Rather, he said what the OFS industry is going through today is more akin to the 1986 rout, when oil prices briefly touched the high single digits.

Though Anderson didn't discuss in detail his view of the exploration & production (E&P) sector, he did predict North American oil and gas demand was in the process of being "permanently reduced" by about 2 million barrels per day. "A lot of E&P firms couldn't make it when crude oil was $50 per barrel, before the recent price crash and the COVID-19 pandemic," he commented. "The days when E&P firms could outspend their cash flow by 10% to 20% are over."

That's why the OFS industry can't revive itself by cutting prices, the Barclays analyst continued. "There's not much room to go lower on OFS prices. And if I operate an OFS company where the equipment has a five-year lifespan, do I want to spend one year of that operating without a profit?" he asked rhetorically.

And the OFS industry can't depend on a future surge in capital expenditures (capex) from E&P firms. While prior oil price collapses have been followed by a 30% to 50% gain in E&P capex, Anderson doesn't see anything like that happening to rescue the OFS industry this time around.

Given the shrinkage he sees in the North American E&P industry, structural productivity gains driven by digitization and data science will be the key to the reinvention of the OFS industry.

"Cloud-based technology ecosystems are being built by OFS leaders" like Schlumberger Limited (NYSE:SLB) (Houston, Texas) and Haliburton Company (NYSE:HAL) (Houston), Anderson told the EnerCom conference attendees on Tuesday. "But the critical step is getting E&P companies to trust digital."

When he spoke of "digital," Anderson said he wasn't referring to supply-chain management technologies that could automatically procure the next shipment of frac sand for a frac job. That was low-hanging fruit, he said. Instead, he was referring to technologies that make a more far-reaching impact on an E&P company's operation: "Digital can reduce a four-man onsite well crew by one person now, and ultimately cut it to one person," he predicted. Artificial intelligence, predictive maintenance and preventative maintenance can prevent accidents at drill sites."

"We're in the early stages of that now, possibly the second or third inning," he continued. Over the last 18 months, he said, Silicon Valley has been courting the OFS industry, seeking alliances or outright acquisition opportunities.

Anderson said the OFS industry will continue through a wrenching rationalization, where more companies will go through more Chapter 7 liquidations than Chapter 11 bankruptcy reorganizations. But by 2022 and 2023, the shape of the new industry will emerge. "Valuation is tricky in a trough," he told the conference attendees on Tuesday. "Investor sentiment is starting to look up, but that's not saying much as many investors have left the industry for dead."

Publicly traded OFS companies just reported a terrible second quarter. For more on that, see August 3, 2020, article - The New Gusher in the Oil Patch? Red Ink.

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