America's Oil Patch Loses Its Luster

Story by Jinjoo Lee • WSJ

The oil-field services sector is still humming along, but its clients are casting their gaze past America’s once-booming shale patch.


America's Oil Patch Loses Its Luster© ali haider/Shutterstock

Industry services giants SLB and Baker Hughes had healthy numbers to report last week. SLB said on Friday that its top line grew 30% in the first quarter from a year earlier, better than the 25% Wall Street expected. Net income grew 83%, handily exceeding expectations. Baker Hughes said on Wednesday that revenue and net income grew 18% and 14%, respectively—also both higher than analyst expectations. Halliburton, the third huge player in the business and the one most focused on North America, releases results this Tuesday.

While spending on short-cycle U.S. shale powered the growth of oil-field services companies last year, long-cycle international spending is expected to take center stage in 2023. SLB said on Friday that the North American land market could see a plateau in activity this year as low natural-gas prices make it uneconomic for some producers to drill for the commodity. U.S. benchmark natural-gas futures have been hovering just above $2 per million British thermal units recently, well below the $3.45 per million British thermal units that price producers say they need on average for drilling to be profitable, according to a first-quarter energy survey by the Kansas City Federal Reserve.

Domestic oil-drilling activity has also been weak. The U.S. oil rig count has dropped almost every week since early February, according to Baker Hughes data. This might reflect caution and price sensitivity from private drillers, which had been quick to add rigs last year but were also quick to drop them when oil prices declined in parts of this year. After some steep cost inflation last year, break-even prices have risen for producers, according to Kansas City Fed survey results. If U.S. benchmark crude oil prices fall to $70 a barrel, private operators could drop a few dozen more rigs; if they fall to $60 to $65 a barrel, up to 150 rigs could stop being employed, according to estimates from Scott Gruber, equity analyst at Citigroup. West Texas Intermediate crude fell below $70 a barrel during parts of March, though it recovered after some members of OPEC+ announced a production cut earlier this month.

Both SLB and Baker Hughes lowered their expectations for North American spending growth this year. Baker Hughes said it expects drilling and completion spending in the region to grow by a low double-digit percentage this year, down from the mid to high double-digit growth it telegraphed three months ago. By contrast, international spending is expected to increase in the mid double-digit range. Baker Hughes’ CEO Lorenzo Simonelli said on his company’s earnings call on Wednesday that pricing in North America is starting to level off across the industry.

Even though some OPEC+ members committed to an oil production cut last month, that hasn’t reduced oil-field services companies’ business prospects. SLB Chief Executive Olivier Le Peuch said on the earnings call on Friday that there have been no signs of slowdown in spending in those countries. The company expects to see its highest-ever revenue in the Middle East this year. Notably, both Saudi Arabia and the United Arab Emirates have ambitious long-term capacity-expansion plans—both for oil and natural gas. Outside OPEC, SLB highlighted Brazil’s goal to expand its oil production to 4 million barrels a day from today’s 3.3 million barrels a day.

Additionally, major international oil companies that previously held back on expensive, long-cycle offshore drilling projects have again embraced it after generating prodigious cash flows last year. Investors have become more receptive to such projects after Russia’s invasion of Ukraine highlighted the importance of energy security, according to Michael Bradley, partner at Veriten, an energy-focused research and investment firm. SLB said it is seeing strong demand for exploration and appraisal services.

Weakness in North American short-cycle activity notwithstanding, oil-field services firms’ unwavering pipeline of long-cycle contracts signal that the world’s producers, whether major European oil companies or national oil companies, are still in the fossil-fuel business for the long haul.

Write to Jinjoo Lee at jinjoo.lee@wsj.com