Just delurking for a short moment to quote the following article from today's Financial Times.
SERVICES: Collapse in prices hits support firms
Hillary Durgin examines how the US industry is trying to cope
Denny Smith has been watching unused oil rigs being mothballed at drilling sites from the oilfields of West Texas and the Rocky Mountains to the historic wells of the north east.
Every time oil prices slip a few cents, another project is in danger of collapse and more equipment is mothballed. If times are tough for the world's oil giants, then they are even tougher for the dozens of smaller companies that provide oil-field services and equipment.
Business is "lousy", says Mr Smith, director of corporate development at Nabors Industries, the world's largest onshore drilling company. In the last year, Nabors has shed 4,000 jobs, or about 30 per cent of its workforce, and has stopped the motors on more than half the rigs it had working in the US.
"It's everywhere," he says of the slowdown. "Nothing's immune."
Apart from cutting staff, the oil service industry is consolidating. Nabors announced last week that it would pay about $272m for a rival, Pool Energy Services. This is not quite Exxon and Mobil getting together, but for an industry that has prided itself on being populated by many small and feisty companies, the spate of mergers and acquisitions is almost an admission of defeat.
In a little more than a year, US drilling activity has fallen by 45 per cent, hardly surprising when oil prices have been hovering at their lowest levels in more than a decade and showing little sign of strong recovery. The services industry, whose international centre is Houston, is itself a series of niche businesses. There are seismic specialists, deep sea divers, helicopter operators and Red Adair-style firefighters.
Consolidation is likely to blur the old boundaries. The larger companies like Schlumberger, Halliburton and Nabors are reducing their workforces and on the look-out for distressed smaller companies in the US and Europe. These companies want to become one-stop shops instead of having to subcontract services such as seismic data collection or subsea construction.
"It's a very good time to be looking at consolidation," says Paul Chambers, oilfield services analyst with Lehman Brothers in Houston. "There are 155 publicly traded oilfield services companies around the world - that's way too many."
It is also a very good time for lawyers. Oil companies have demanded that contracts for services be renegotiated given that projects profitable at about $15 per barrel are not viable with the price hovering at $12. An important test case is likely to be one involving Mobil, which withdrew from a contract with R&B Falcon to provide a floating, deep-water drilling rig in the North Sea.
Mobil said mechanical problems with the rig's mooring system made it impossible to start work on the project. Falcon, however, avowed it was not in default of the contract and is pursuing legal action.
Oil companies are scouring their portfolios for projects to cut. At the end of last year, they expected to reduce exploration and production spending by 11 per cent to $79.21bn in 1999, the most severe contraction since 1986, according to a survey by Salomon Smith Barney.
But Salomon analysts forecast that the drop in the price of oil to below $14.50 could curtail spending by as much as 20 to 25 per cent. On top of that downturn, some oil companies are demanding that suppliers discount their services by 10 to 20 per cent.
Halliburton recently said it would cut 2,750 jobs in its energy services group and take pre-tax charges in the fourth quarter totalling $95m. That is on top of the 7,250 jobs that the company, which is the largest provider of oilfield services employing about 100,000 people, said it would shed in October.
In announcing the year-end charges, Halliburton said it was experiencing payment delays by oil company customers, and that some of its partners and contractors could not cover their share of expenses.
Those conditions are a prescription for further merger and acquisition activity this year. In particular, analysts expect mergers among companies that operate in the shallow waters of the Gulf of Mexico, where the oil companies have scaled back activities. For example, on Monday, Global Marine, the offshore driller, said it was looking to increase its size and scope, and, on Tuesday, Core Laboratories, a seismic services company, said it was to buy GeoScience, a seismic equipment maker, for about $167m.
For its part, Nabors is looking for more acquisitions to increase its size, cut costs, and expand its array of drilling and other services. "It's a matter of how much economic sense it makes," says Mr Smith. "The whole horizon is open." |
