Oilfield services companies have generally reported that the third quarter marked a modest turning point in their drilling services business. Rowan Companies (RDC), BJ Services (BJS), Baker Hughes Inc. (BHI), Halliburton (HAL) and Schlumberger (SLB) all pointed to the second quarter as the low point.
But if there’s a recovery, it is barely discernible. Rig counts are up by single digits sequentially and still down dramatically year over year. Yet share prices are near 52-week highs for most oilfield services companies.
Share prices are up because crude prices are up. The thinking is that as crude prices rise, demand for crude will rise and with it demand for drilling and other field services.
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Normally that would be true, but these are not normal times. Crude producers are not planning huge increases in capital expenditures next year, even though crude prices are double what they were at the end of 2008.
Day rates for drilling rigs are rising again after falling in the first half of the year. That’s good news for drillers and bad news for producers. However, the reverse is true for rig utilization: the overall utilization rate is dropping.
That means drillers might have to lower day rates in order to tap into lower overall capex budgets. That’s a survival tactic, not a growth strategy.
It’s good to keep in mind that capital spending is not guaranteed either. If the price of crude drops, even the trimmed capex budgets could fall even more. That puts still more pressure on the oilfield services earnings numbers.
The only thing that really helps the services business is crude prices at a high enough level to get producers into the field again. That will almost certainly happen. But not until the global economy really starts to show steady growth and demand for oil and natural gas shoots up again.
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