What Are Oilfield Service Companies?
Oilfield service companies strive to deliver innovation to the industry & cost savings to customers.
Oilfield Services (OFS) companies vary in size as well as in the scope of support they can provide, and oil companies have increasingly relied on them for their technological innovations to drive down costs. They have enabled oil companies, in most cases, to have a single point of contact for products and services needed to construct, complete, and produce oil and gas wells.
Services available from an OFS company largely cover those activities that are part of the upstream segment of the industry: Generally, anything related to oil extraction equipment. Some of these companies, especially the larger ones like Schlumberger (doing business as SLB), can offer a full scope of services across the value chain.
The real value of service companies is their ability to generate economies of scale and advancements in technology, as most oil companies — with the exception of some national oil companies that need to retain some level of local content for contracts — have outsourced tasks in the field life cycle including procurement, construction, laying down pipe and more. According to Spears and Associates, the number of OFS companies offering integrated project management has grown from 15% in 2010 to 25% in 2020 — and that trend is expected to continue. OFS companies act as the boots on the ground, freeing up oil companies to focus on where to drill and overall project management.
A Little History
The evolution of OFS companies started in the 1980s, when oil companies focused on ways to be more efficient in the face of low oil prices. Many started this transition by licensing low-margin activities, such as drilling, to other companies. Later, mega-mergers like BP-Amoco in 1998 and Exxon-Mobil in 1999 led these companies to shed the multiple service providers they had in-house in favor of OFS companies.
Over time, OFS companies have taken on more risk for the oil companies. Some OFS companies have grown by developing proprietary technologies, which have become best practices in the industry while simultaneously helping companies better manage their costs.
This has created growth opportunities for OFS companies like Petrofac, which started in Tyler, Texas as a producer of modular plant and became a global company that supports the largest wind farm in Scotland, among other major projects.
How To Select An OFS Partner
How do oil and gas companies select their OFS partners? Most of the time it's a matter of risk management and finding complementary abilities.
Some of the more well-known OFS companies capable of delivering services for increasingly complex projects include Schlumberger and Halliburton. Others are global, like Petrofac and Wood Mackenzie, while still others are local or referred to as "indigenous." The latter tend to be smaller companies seeking smaller niches and often receive government subsidies. Depending on where in the world the OFS company is located, it may be a subsidiary of a national oil company as is the case in China.
In terms of structuring a deal with an oil company, the OFS may be positioned as more of a partner versus strictly a supplier by holding equity in a project, thereby sharing financial risks and rewards.
Success Outlook
The success of an OFS company can be driven by several factors but is largely dependent upon the budget of an Exploration & Production (E&P) company. Analysts track well and rig counts as an indicator of the overall health and profitability of these businesses, which also commonly tout metrics such as equipment orders and backlogs.
By many accounts, OFS companies are now seeing significant opportunities for growth. Here are a few excerpts from recent press releases:
Schlumberger Limited (SLB)
From SLB CEO Olivier Le Peuch: “Looking ahead, we believe the macro backdrop and market fundamentals that underpin a strong multi-year upcycle for energy remain very compelling in oil and gas and in low-carbon energy resources. First, oil and gas demand is forecast by the International Energy Agency (IEA) to grow by 1.9 million barrels per day in 2023 despite concerns for a potential economic slowdown in certain regions. In parallel, markets remain very tightly supplied. Second, energy security is prompting a sense of urgency to make further investments to ensure capacity expansion and diversity of supply. And third, the secular trends of digital and decarbonization are set to accelerate with significant digital technology advancements, favorable government policy support, and increased spending on low-carbon initiatives and resources.”
“Based on these factors, global upstream spending projections continue to trend positively. Activity growth is expected to be broad-based, marked by an acceleration in international basins. These positive activity dynamics will be amplified by higher service pricing and tighter service sector capacity. The impact of loosening COVID-19 restrictions and an earlier than expected reopening of China could support further upside potential over 2023.”
“Overall, the combination of these effects will result in a very favorable mix for SLB with significant growth opportunities in our Core, Digital, and New Energy. We expect another year of very strong growth and margin expansion. We have a clear strategy, an advantaged portfolio, and the right team in place to drive our business forward. I look forward to another successful year for our customers and our shareholders.”
From Weatherford International President, CEO & Director Girishchandra K. Saligram: "On the offshore side, we are seeing signs of market activity picking up and are well positioned to capture it across our portfolio, especially with our MPD and TRS offerings. The momentum of our international markets continues to gain traction and support the multiyear up-cycle view across all segments and markets. Middle East and Latin America activity continue to be robust, and there will be incremental opportunities as activity further ramps up. In summary, the overall macro environment for the sector continues to be supported by solid fundamentals despite continued inflationary and geopolitical headwinds. Our ability to carry our momentum forward is evident in the commercial wins in 2022, including over $6.5 billion of wins with IOCs and NOCs across our broad customer footprint. In the coming quarters, we will begin to see the impact of our new contracts, technology advancements and partnerships, as we continue to focus on margins, cash flow and positioning the company for success over the long term.”
From Chief Executive Officer Jeremy Thigpen: “As an industry, it is clear that we have finally emerged from eight exceptionally challenging years and are now in the early stages of what we believe will be a multi-year upcycle. To maximize value for our shareholders during this upcycle, Transocean will continue to secure high-quality backlog, maintain our acute focus on operational excellence, exercise capital discipline, and take the necessary steps to right-size our balance sheet.”
From Wood Mackenzie Vice Chair, Americas Ed Crooks: "The exploration and production companies have focused on strengthening their balance sheets and returning capital to shareholders, and — helped by the rebound in oil prices — have been rewarded with a 108% rise in the S&P 500 energy index in the past two years, far outpacing the 8% rise in the broader index. Oilfield service companies are pursuing the same strategy of capital discipline. An industry that has been often brutally cyclical is aiming for greater stability and better performance for investors.”
"If tight markets for oilfield services do continue to drive up operators’ costs, as we expect, then their margins could come under pressure. If the world economy remains robust and oil and gas demand continues to grow, then healthy commodity prices could allow both operators and services companies alike to achieve their goals for earnings, cash generation and distributions to shareholders.”
The Takeaway
Because they have strengthened their balance sheets during the good times, both operators and oilfield services companies may be better prepared to face the next economic downturn — making oil and gas an attractive sector for some investors.
On DealStream, you’ll find opportunities ranging from investing in oilfields and wells to drilling projects and fuels. Check it out and get started investing in this promising sector!
Tom Schwendler is a former communications manager for GE Energy with more than 20 years of experience in corporate communications. He recently published two books and works as a freelance communications consultant. He resides in upstate New York.
