Oilfield Services Weekly Notes: Scrapped Rigs, Lower U.S. Activity, New Technologies

The oilfield services sector had another news-filled week, with the North American oil rig count continuing its descent as capital spending cuts continued to take effect and oil prices remained low. As of Thursday, Benchmark Brent crude was trading at levels of under $55 per barrel while WTI was trading at under $44 per barrel, on the back of a strong U.S. dollar and also due to a possibility that the nuclear deal with Iran might materialize, potentially easing sanctions on oil exports from the country. In other news, Transocean (NYSE:RIG) announced that it expects to dispose of another four rigs, while Schlumberger (NYSE:SLB) unveiled new ultra high-temperature drilling technologies. Here’s a quick roundup of the news that mattered for the oilfield industry and stocks that we cover.

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Rig Count Trends Lower, Don’t Expect A Major Impact

Oil directed drilling activity in the U.S. continues to trend lower, with Baker Hughes (NYSE:BHI) reporting that drillers laid down another 56 rigs over the last week, taking the oil rig count to 866 for the week ended March 13.  The oil rig count is down by roughly 42% since the beginning of this year and around 46% from its mid-October 2014 highs. ^[1] The horizontal rig count, an indicator of unconventional drilling activity, is down by about 37% year to date. The vertical rig count, an indicator of activity in conventional plays, is down by about 45% since the beginning of this year to 166 rigs. While the decline in the rig count has been abrupt, we believe that it will not translate into a similarly sharp drop in North American revenues for the oilfield services companies that we cover. While demand for reservoir characterization and drilling related services could decline meaningfully, demand for production-focused services is likely to hold up much better as operators seek to extract maximum production from their existing wells.

Transocean Plans To Scrap 4 More Rigs Amid Offshore Downturn

Earlier this week, Transocean issued its monthly fleet status report for the period from Feb 17, 2015, noting that it was looking to dispose of four rigs – Deepwater Expedition, Transocean Legend, Transocean Rather, and GSF Arctic III – that were previously classified as held for sale. The company intends to book an after-tax charge of between $300 million and $325 million related to the same. ^[2] This brings the company’s tally of rigs to be scrapped to 16, up from 12 in January. The move indicates that the market for rig rentals and sales remains challenging owing to the oversupply in the market. While Transocean has been proactive about right-sizing its fleet, cutting operating costs and taking timely write downs, much of the company’s problems are industry related. We believe that a recovery will ultimately hinge on improvements in rig demand, which would help to prop up the company’s 2 key operating metrics – utilization rates and dayrates.

• We have a $20 price estimate for Transocean, which is about 40% ahead of the current market price. We forecast revenues of about $8 billion for 2015. Our EPS estimate for 2015 stands at $2.00, which compares to a consensus of $1.73 according to Reuters.
• Transocean stock saw significant volatility this week, rising from under $14 on Monday to as high as $15.50 on Wednesday. However, the stock fell by over 7% on Thursday, closing at about $14, owing to news of the rig disposal and lower crude oil prices.

Schlumberger’s New Ultrahigh-Temperature Drilling Technologies

Schlumberger, the largest oilfield services company, introduced new ultrahigh-temperature drilling technologies, including the TeleScope ICE measurements-while-drilling service and PowerDrive ICE ultrahigh-temperature rotary steerable system. ^[3] High-pressure, high-temperature (HPHT) wells are typically challenging for operators, and Schlumberger notes that its new offerings help customers better mitigate operational risks while drilling wells with greater precision.

• We have a $95 price estimate for Schlumberger which is about 17% ahead of the current market price.
• Schlumberger stock has been largely range-bound this week, trading at levels of between $80 to $82 through Thursday.

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More Trefis Research

1. North America Rig Count, Baker Hughes [↩]
2. Transocean Fleet Status Report [↩]
3. Schlumberger releases new ultrahigh-temperature drilling technologies, Offshore Engineer, March 2015 [↩]