In our Themes from Q1 Earnings Calls, Part 2: Oilfield Service Companies blog post, prevalent themes included OFS companies targeting short-term projects, as well as shifting towards a strategy focused on margin expansion. Executives also noted that private operators have an increasing level of importance to public companies due to increased activity.
In another recent blog post, Talk To The Hand: Upstream Industry Eyeing Returns More Than Rigs, we further examined the shift towards margin expansion in upstream companies as opposed to ramping up production.
This week we focus on the key takeaways from OFS operators’ Q2 2022 earnings calls.
Energy Security Takes Center Stage Amid Supply Challenges
Many OFS companies noted in their earnings calls that the industry faces a unique operating environment in terms of both supply and demand. Ongoing COVID-related supply challenges have caused oil and gas prices to rise throughout the past twelve months. This is favorable to OFS Companies as this increases the demand for their products and services. In recent months, firms have seen significantly increased demand as countries worldwide grapple with the impact of the Russia-Ukraine conflict and seek to ensure energy security for themselves.
- “With energy security firmly in focus, the diversification of supply sources is the central theme in the international markets. Never has energy security been a bigger issue to governments and people all over the world. However, political agendas and years of underinvestment in many markets make it harder to address this critical requirement.” – Jeff Miller, Chairman, President & CEO, Halliburton
- “Although a potential economic recession has pushed oil and gas prices off recent highs, our outlook remains constructive. The world is facing a significant energy shortfall and the oil and gas industry needs to increase activity in order to provide greater energy security to the global economy. That urgent activity will need to come at a time when the industry's tools, its rigs, drill pipe and pumps have been idled, depleted, cannibalized and worn out through a pandemic shutdown that has produced the most withering downturn the industry has ever seen.” – Clay Williams, Chairman, President & CEO, NOV
- “I think that my near-term concern has to do with ancillary supply issues because we're hearing a lot of comments about pipe availability… rig availability, sand availability, even cement availability. So I think that there's a desire probably to increase activity beyond the industry's capacity to support that. And I've mentioned that in previous calls that, that was my greatest concern, it's probably even more a concern today.” – Scott Bender, President, CEO & Director, Cactus
Continued Focus On Margin Expansion
In earnings calls from the first quarter, many companies highlighted that they were shifting their strategies to focus on expanding margins in the face of limited supply rather than the pursuit of larger market share. This strategy seems likely to continue throughout the rest of 2022.
- “As the bulk of our integration efforts are not complete, we'll be turning our attention to making incremental improvements in the operating efficiency of our cost structure and we'll be striving to continue to improve EBITDA margins each quarter. We also believe that some of the incremental pricing gains achieved in the second quarter will demonstrate their full effect during the third quarter.” – Stuart Bodden, President & CEO, Ranger Energy
- “As equipment availability continues to tighten, we expect prices will increase further. Due to the long-term nature of international contracts, only about one-third of our work re-prices every year. This means that margin and pricing inflections internationally will always materialize at a slower pace than in North America. We see evidence of customer urgency indicated by customer preference to pursue direct negotiations for contract extensions. The efficiency gains over the last several years have all accrued directly to operators, and there is still a great deal of room in customer's economics for service providers to earn a fair and durable return.” – Jeff Miller, Chairman, President & CEO, Halliburton
- “While the second quarter saw a meaningful double-digit percentage increase in drilling activity, completion activity continued to modestly lag during the period with a single-digit percentage growth. However, we believe this activity ratio is starting to normalize and we expect to see more completion activity during the third quarter, supported by continued strong overall commodity price environment. Underpinned by growing activity, strong commodity prices, further price increases and continued operational efficiency gains, we expect to see further improvements to our financial performance, including meaningful free cash flow during the second half of 2022.” – John Schmitz, Founder, Chairman, President and CEO, Select Energy Services
Optimism in the Face of a Potential Recession
While most firms noted that the near-term broad macroeconomic outlook appears bleak, most executives signaled confidence in the long-term performance of their firms given that prices will likely remain elevated due to highly limited supply stemming from limited investment during the peak of the pandemic, among other reasons. Mercer Capital examined some of the reasons for OFS firms to be feeling optimistic in our post, Oilfield Service Valuations: Dawn Is Coming.
- “In short, this cycle has been nothing like prior cycles. This means any economic slowdown will not solve the structural oil undersupply problem.” – Jeff Miller, Chairman, President & CEO, Halliburton
- “As noted earlier, given our significant leverage across the company to production and workover barrels, we continue to believe that demand for our services will remain strong even if the commodity price environment deteriorates somewhat due to recessionary conditions.” – Stuart Bodden, President & CEO, Ranger Energy
- “I'll acknowledge that many are of the view that we face a global recession in the near term. Recessions can reduce demand or more accurately, they usually just flatten growth in demand for oil and gas, thereby reducing prices and activity. However, coming out of historically low levels of oilfield activity that marked the pandemic shutdown, with nearly all excess OpEx back in the marketplace, with the release of the SPR expected to end soon, with the number of viable DUCs in North America drawn down significantly in the past few years, and with oil and gas and product inventories low and falling, man, it's hard for me to imagine anything other than continued growth of this sector for the next several years” – Clay Williams, Chairman, President & CEO, NOV
