KUALA LUMPUR (April 1): The global oilfield services and drilling (OFS) industry is entering a deep, protected cyclical downturn as exploration and production (E&P) companies cut spending in response to the plunge in oil prices, according to Moody's Investors Service.
In a report entitled “Weak Oil Prices and Deep Upstream Spending Cuts Will Prolong Pain” released today, the rating agency's outlook for the global oilfield services and drilling industry remains negative.
Moody's said its outlooks reflected its view of fundamental business conditions in a given industry over the next 12 to 18 months.
Moody’s assistant vice president and analyst Sajjad Alam said the agency’s negative outlook for the global OFS industry reflected the steep decline in upstream exploration and production (E&P) spending it expects over the next year or so.
"Oil prices will remain weak in 2015, with overall E&P spending down about 25% over last year's levels as a result,” said Alam.
The report said that upstream spending reductions would hit OFS companies' earnings with a lag and credit metrics will deteriorate across the board.
Alam said if oil prices average US$55 a barrel this year, OFS companies' aggregate earnings before interest, tax, depreciation and amortisation (EBITDA) would be down 25%-30% over 2014 levels, while prices below US$45 a barrel would drag EBITDA down more than 35%.
"No segment of the oilfield services and drilling industry will be immune to E&P companies' spending reductions, but the strain will vary by subsector and geography.
"Well-diversified companies with high-quality assets, superior technology, some contractually protected revenue backlogs and well-capitalized customers will cope more easily,” said Alam.
Moody’s report said the "big three" OFS companies, namely Schlumberger, Baker Hughes and Halliburton, would remain the strongest through the downcycle.
“Paragon Offshore and Hercules Offshore will see the sharpest decline in earnings as contracts expire on their mostly older-generation jack-ups.
“Meanwhile, Transocean and Diamond Offshore Drilling have the most older-generation floating rigs rolling off contracts through 2016,” it said.