Tuesday, March 24, 2020

Fracking Giants Warn Shale Crash Will Be Faster This Time

David Wethe Bloomberg March 24, 2020


(Bloomberg) -- Two of the world’s biggest oilfield service companies are warning of a bigger shale crash than the one that hit the U.S. and Canada just five years ago.

While the decline in North American drilling rigs could approach the lows seen in 2016, the drop could be much faster this time around, Schlumberger Ltd. told analysts and investors Tuesday on a webcast hosted by Scotia Howard Weil. And as the most financially troubled oilfield service providers seek to stay afloat, there’s not much help this time around, Halliburton Co. said on the same webcast.

Investors cheered plans by both companies to significantly slash spending. Halliburton soared as much as 33% for a history-beating advance, while Schlumberger climbed 11%.

“Wall Street is shut to the industry,” Lance Loeffler, chief financial officer at Houston-based Halliburton, said during the webcast. “There is no more lifeline. Financial markets aren’t lending their support.”

Halliburton, which generates most of its business in the U.S. and Canada and leads the world in fracking, is planning for the possibility that nearly two thirds of rigs in the region could be shut down by the final three months of the year. Schlumberger, the world’s biggest overall oilfield services provider, said it’s slashing its own spending by as much as 30% in 2020.

North America, which has been roiled by contractions in the past, may see a sharper, more abrupt cut in drilling before the end of the second quarter, Chief Executive Officer Olivier Le Peuch said on the call.

“We’re acting sharply and decisively in this context,” he said. “It will reach in a matter of weeks the trough, where it took a year or six months to reach a trough last time.”

While changes to rig activity generally lag the movement of oil prices by several months, shale explorers have wasted no time cutting where they can. Oil drilling in the Permian Basin of West Texas and New Mexico, home to the world’s biggest shale patch, plunged to its lowest level since the nadir of the last crude-market slump in early 2016.

At its worst, the U.S. rig count could see a 70% drop over a six-month period, eclipsing the greater than 60% cut in 1986, according to Raymond James.

“We believe OFS companies and investors need to prepare themselves for activity to fall at an unprecedented rate,” Praveen Narra, an analyst at Raymond James, wrote Monday in a note to investors. “We believe that E&Ps attention to free cash flow, as well as several with credit issues, will force spending reductions that are far more drastic than in previous downcycles.”

©2020 Bloomberg L.P.


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