Posted by Doug Sheridan - EnergyPoint Research
Few sectors have ever fallen farther over any extended period than oilfield suppliers have since the beginning of the current industry downturn in June 2014. Relative to the broader market, the sector's decline may be totally unprecedented.
Six years ago, Saudi Arabia fired the round felt around the world when it declared it would no longer hold millions barrels of production off the market in support of global oil prices in excess of $110 per barrel.
The market's response was swift. Crude was near $60 within a year, and the supplier sector, as measured by the Philadelphia Oil Service Index (OSX), was off 35%. The tailspin had begun.
In each of the next two years, the OSX was down 15.7% and 22.3%, respectively. The following year, fueled by unfounded faith in the U.S. shale-oil story and a strengthening forward curve, the OSX managed a 14.8% gain.
But as suppliers moved to cut-throat pricing in response to overcapacity, the index fell by 45.6% the next year. That wasn't the worst of it. With oil demand waylaid by the Coronavirus pandemic, the index is down by an almost-impossible 59.2% in the most-recent 12 months ending June 30th.
All tallied, over the six years ending June 30, 2020, the OSX is down by 89.3%—even as the broader S&P 500 Index grew by 60.4%. The OSX, launched in 1996 at a base value of 75, hit its all-time low of 21 on March 18th. At one point in the rout, a price in the single-digits was not out of the question.
Over the same period, Brent crude is down 63% and Henry Hub natural gas is off 65%. The S&P E&P Index (XOP) is down 83.9%.
While there's been plenty of bad luck to go around, it can't explain the intractable refusal of many in the supplier community to do much other than wait with crossed fingers. The main culprit is an almost mystical belief that somehow, someway cast-strapped customers—after deftly exploiting suppliers' grit and sacrifice—will eventually start paying premiums for the very same products and services they've worked so hard to commoditize.
One problem is lack awareness. Too many executives at suppliers seem to believe that the huge footprints their companies developed during the 2003 – 14 “oil-scarcity” boom will be required going forward. Nothing could be farther from the truth.
This shouldn't come as a surprise to anyone paying attention. In fact, EnergyPoint began sounding the alarm in 2017. Even prior to this, the sector had its own canary in the coal mine pointing to the unsustainability of these business models.
In 2014, Weatherford International was the fourth largest oilfield supplier on the planet, behind Schlumberger, Halliburton and Baker Hughes. The company spent untold billions building a full-service global provider designed to ride the oil and gas industry into the twenty-first century. In reality, with me-too strategies and too many lackluster offerings, the company was never really more than an also-ran.
When the industry downturn took hold in 2014, the veil fell. Beginning in 2015, Weatherford began a streak of 21 consecutive quarters of net losses totaling more than $14 billion. The coming quarter will likely be the 22nd.
When the fourth-largest supplier to an industry that spends half-a-trillion dollars per year fails—in very public fashion—to earn a profit for five years running, the entire sector needs take a hard look at the road forward.
What they will find is that unless suppliers—even those that emerge from bankruptcy with clean balance sheets—start to truly differentiate themselves from peers, their prospects remain dim. Yes, maybe a price spike here or there will materialize. But suppliers need greater simplicity and foresight in their strategies if they are to prosper over the long term. They also need to think (and act) differently.
The byword in the sector must be focus; the tools fact-based decision-making and unemotional methods. While it can be risky to toss old ways of doing things without adequate analysis, crises have a way of diminishing resistance to needed change. Jettisoning legacy businesses becomes more palpable, and outdated norms are more easily challenged. Sacred strategies are allowed to be scrutinized.
Those companies that make the necessary changes and ultimately survive will see opportunity. The global petroleum industry may be on its heels, but it remains immense. Despite the move toward decarbonization, the world will need oil and gas for decades. After all, even during the peak of this year's downturn, demand for oil dropped only by 20%.
In addition, supermajors like ExxonMobil, BP, and Shell have huge existing reserves that will take decades to produce. State-owned giants like Saudi Aramco and Petrobras have even more. They will all spend more to add to reserves. In North America, the industry will be smaller but far from vanquished.
In the end, the smartest suppliers will capitalize on existing skills, assets and market positions by sticking to what they do best. Those that structure themselves to be profitable in the industry as it stands today—through smart downsizing and consolidation, leaner operations, greater focus on customer satisfaction, and even selectively moving into other energy-related fields—have the best chance of surviving. Eventually, some will even prosper.
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