For the oilfield services industry, it’s no longer about merely navigating a downturn. It’s now about survival.
The service companies that handed out discounts in the downturn are barely holding on. Schlumberger Ltd. and Halliburton Co., the two biggest, have each fallen by more than 65% since crude started tumbling, and Weatherford International Plc on Monday filed for bankruptcy. Contrast that with the oil producers, collectively down less than 50%.
The gear glut is taking a toll as service companies are jockeying to defend their share of an increasingly lean market. The prices charged by service companies are at their lowest levels since September 2016, with more companies dropping prices than raising them, according to data from the Federal Reserve Bank of Dallas. The servicer price index hasn’t risen for at least a year, the bank’s quarterly surveys show.
As shale drilling technology and efficiency gains continue to improve each year, the break even point continues to go down for the shale productions. The latest break even point figure is near $50 now. But just because the break even point has declined, doesn’t necessary mean more profits. Although oil prices are higher relative to previous years.
The oil sector relative to the equity markets continue to decline, which means the break even point must continue to come down in order for companies to have a chance of survival.
And since the oil services company exist because of the oil production companies, it only makes sense that they are fighting for their lives as well.
VanEck Vectors® Oil Services ETF (OIH®) seeks to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, which include oil equipment, oil services, or oil drilling. The chart suggest OIH is headed lower over time.
This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.