U.S. oil service firms face tough quarter despite high crude prices
By Liz Hampton
HOUSTON, Oct 17 (Reuters) - Even as crude prices hover nearfour-year highs, U.S. oilfield service firms' third-quarterresults due out in coming days will reflect a shaky recovery, astheir customers face drilling constraints and pressure to holddown spending.
Oil producers are holding off finishing new wells, and costpressures from tight labor markets and U.S. tariffs on importedsteel are driving up service firms' costs.
Meanwhile, shale producers including Devon Energy Corp and Oasis Petroleum Inc are doing more worktraditionally handled by service companies. The west Texas drillers that drove the shale revolution haveoverwhelmed the region's infrastructure with oil production-driving up costs, depressing regional oil prices and slowingthe pace of production growth. "The risk for a number of (oilfield service) firms is to thedownside," said Brad Handler, a Jefferies equity analyst in NewYork who follows the oilfield service sector.
Wall Street is trimming earnings forecasts for oilfieldmarket leaders' Schlumberger NV and Halliburton Co, and for pressure pumper Keane Group Inc andsand provider U.S. Silica Holdings Inc. Schlumbergerkicks off third-quarter reporting by the sector on Friday.The cuts are coming despite third-quarter oil prices that are up more than 40 percent from a year earlier.
Schlumberger is expected to report a profit of 47 cents ashare, up from 39 cents a share, in the same quarter a year ago,according to Refinitiv I/B/E/S. Halliburton's per share profitis expected to be 49 cents, compared with 42 cents a year ago.
(For a graphic of oilfield service shares compared with theU.S. crude benchmark, click here: )
Weakness in completing wells is worrisome because such
services have carried the day for firms still waiting foroffshore drilling to pick up. Completing a well by fracking and tying it to pipelinesrepresents about 60 percent of onshore well expenditures. Withproducers holding off completions until new pipelines start upnext year, there is less demand for services.
"The market for frac spreads is very soft, below even whatwe started in 2018," Bill Thomas, chief executive of EOGResources Inc , told investors at a New York conferencelast month.
The number of active hydraulic fracturing spreads or fleetsin the Permian, the largest oilfield in the United States, hasfallen to 172 from 192 earlier this year, and such fleets activeacross the U.S. have dropped to 460 from a peak of 480,according to data provider Primary Vision.
"Lower utilization and increased completion efficiencies iscreating more slack in the system, with pressure pumpers most atrisk heading into year end," Barclays said in a note this month.
Producers' unwillingness to raise spending despite higheroil prices also is taking a toll. Analysts at Barclays estimatethat more than 80 percent of producer upstream budgets soon willbe tapped out if third quarter spending was similar to thesecond quarter's.
Bernstein analysts estimate there could be a 15 percentfurther decline in fracking activity, but they expect the marketto bottom early next year.
"There is still risk of further declines as we approachwinter and roll into the new E&P (exploration and production)budget cycle," Colin Davies, a senior analyst for Bernsteinwrote in a note.
(Reporting by Liz HamptonEditing by Marguerita Choy)
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