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Oilfield Service Companies Expect Drilling Activity to Slow

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Rig service companies express misgivings

In this part, we’ll review the major oilfield service companies’ outlook for the US market. Many of these companies estimate that offshore drilling activity will slow in 2015.

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Management views

Schlumberger (SLB) is the largest oilfield equipment and servicing company. In corporate releases related to its 4Q14 earnings, Schlumberger was cautious about 2015 US drilling activities. Crude oil prices are clearly a concern for oilfield service companies.

Schlumberger’s (SLB) management stated, “In response to the falling oil prices, the industry is currently in the process of significantly reducing E&P investments which will lead to a reduction in supply as declining rates impact current production capacity and lower exploration and development activity delay supply additions.”

Schlumberger (SLB) makes up 19.2% of the VanEck Vectors Oil Services ETF (OIH) and 6.9% of the Energy Select Sector SPDR ETF (XLE).

Halliburton (HAL), another oilfield giant, was more forthright about the uncertainty the energy industry faces moving into 2015. It said upstream companies will renegotiate contract terms with oilfield service companies, which may cause HAL’s revenues to fall. Its management stated, “price discount discussions with customers did begin in the fourth quarter and have accelerated over the past several weeks. And price reductions are now occurring across all product lines.”

Many upstream companies have already reduced their 2015 capex (capital expenditure) budgets.

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Industry consolidation

Meanwhile, falling crude oil prices have stirred things up in the oilfield equipment and servicing industry. On November 17, 2014, Baker Hughes (BHI) signed a definitive agreement to merge with Halliburton (HAL). If it goes through, it will be the biggest deal ever in the industry. The agreement may also mark the beginning of a consolidation trend in the industry. For more on this topic, read Baker Hughes-Halliburton: A critical deal for the oil industry.

BHI and HAL together account for 9.4% of the Energy Select Sector SPDR ETF (XLE).

Ensco, Seadrill, and BP update

In March, BP (BP) terminated contracts for two deepwater oil drilling rigs in the Gulf of Mexico. Ensco (ESV) and Seadrill Partners (SDLP) operated these rigs. BP felt the rigs in question were “surplus to requirements following BP’s adjustment of capital expenditures in response to the new, lower oil price environment.” In 2015, BP plans to reduce capex by 13% over 2014.

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