Is the OFS Industry Geographically Diversified?
OFS companies’ geographic revenue concentrations
We’ve already discussed how oilfield equipment and services (or OFS) companies have been negatively affected by energy price weakness and the US rig count fall. OFS companies’ revenue shares from North America have fallen considerably over the years. Since crude oil price weakness hit drilling activity hard in 2014, OFS companies have actively been looking to diversify out of the United States.
On average, the North American revenue share for Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), and National Oilwell Varco (NOV) came down to 32% in 2015, compared to 46% in 2011. In 3Q16, SLB, HAL, and BHI’s average North American revenue share improved marginally to 33%. SLB makes up 0.62% of the Vanguard Growth ETF (VUG). The oil and gas sector accounts for 1.3% of VUG.
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What do OFS companies’ managements expect?
OFS companies’ managements expect onshore drilling activity to recover quickly. They also expect upstream activity recovery to concentrate in North America, MENA (the Middle East and North Africa), and Russia during the remainder of 2016 and in 2017. In the United States, drilling activity in unconventional shales could rebound sharply if crude oil prices remain strong.
Which OFS services will benefit more?
Some OFS companies’ managements expect their companies’ pricing to stabilize. In the past year, most OFS companies had to yield to large pricing concessions to counter the energy market recession. Increased North American land activity could benefit pressure pumping, artificial lift, and completion activities at the initial recovery level. These activities are closely linked to hydraulic fracturing in unconventional US shales.
However, many OFS companies’ managements expect several international geographies to stay weak due to pricing pressures and unfavorable business mixes.
Next, let’s discuss how the OFS industry affected drilling productivity in key US shales.