How Deeply Leveraged Are Oilfield Services Companies?
Why OFS companies’ net debt could be a concern
Earlier in this series, we learned that cash flows have been volatile for oilfield equipment and services (or OFS) companies following upstream energy companies’ budget slashes and the depression in crude oil prices. This could seriously impair OFS companies’ debt-servicing abilities, even leading to bankruptcy.
Some OFS companies have been actively recapitalizing in order to avoid liquidation concerns. In this context, read Market Realist’s Weatherford Infuses Capital into Its Leveraged Balance Sheet.
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Schlumberger’s net debt and indebtedness
Schlumberger (SLB), which has the largest balance sheet in the OFS industry in the United States, saw a 338% rise in its total debt between 2009 and 2015. Its net debt rose a whopping 59x during this period, as short- and long-term debt growth exceeded cash and marketable securities’ growth. Net debt is aggregate short- and long-term debt less cash and marketable securities. From 2014 to 2015, SLB’s net debt growth was minimal.
SLB’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) was range-bound in the seven years leading up to 2015, as its EBITDA rose significantly. However, in the first nine months of 2016, the ratio rose following the sharp fall in the company’s EBITDA.
Net debt and indebtedness: HAL, BHI, and NOV
From 2009 to 2015, Halliburton’s (HAL) net debt swelled 340%. By September 30, 2016, HAL’s net debt rose 71% compared to December 31, 2015, after the company added significant debt related to its proposed Baker Hughes (BHI) acquisition. HAL’s net debt-to-EBITDA spiked significantly from 2009 to 2015. It deteriorated even further in the first nine months of 2016, because HAL’s EBITDA turned negative in the period. Halliburton makes up 0.17% of the WisdomTree Total Dividend ETF (DTD).
From 2009 to 2015, Baker Hughes’s net debt swelled 7.3x. However, on September 30, 2016, BHI’s net debt turned negative. This was because it received $3.5 billion from HAL after their proposed merger was terminated. BHI’s net debt-to-EBITDA ratio was moderate from 2009 to 2014. In 2015 and the first nine months of 2016, BHI’s EBITDA turned negative.
From 2009 to 2014, National Oilwell Varco’s (NOV) net debt was negative, as its cash and marketable securities exceeded its total debt during the period. In 2015, NOV’s net debt turned positive because its total debt rose while its cash and marketable securities fell. Its net debt-to-EBITDA ratio was 5.2x in 2015, high compared to those of its peers. In the first nine months of 2016, NOV’s EBITDA turned negative.
Next, we’ll discuss OFS companies’ performances in the stock market.