Wicklund: Consolidation, sustainability will likely be focal points for E&P, OFS sectors in near term
By Stephen Whitfield, Associate Editor
This year has been a difficult one for E&P companies and the oilfield service sector (OFS), and next year will likely bring more of the same. According to Jim Wicklund, Managing Director at Stephens Investment Banking, the onshore US drilling and completion market has bottomed, will continue to be challenged and is unlikely to return to 2014 levels anytime soon. The industry that emerges from this downturn will be smaller as operators and service providers consolidate.
Yet, this is not necessarily a bad thing. Having too many players and too many rigs would likely push oil prices into the single digits, he said, because drilling contractors have taken efficiency to such high levels in recent years. “… and to be perfectly honest, with 450 to 600 rigs we can meet the growth in demand and maintain production,” Mr Wicklund said at the 2020 IADC Annual General Meeting on 6 November. “There will be people left standing. There will be fewer of us. The industry will be smaller, but it will be a more efficient and a more profitable industry, an industry where technology is increasingly critical in every facet of the business.”
In order for the industry to survive in the long term, he also emphasized that it needs to change its definition of value creation, noting that the top 21 shale E&P companies have collectively outspent their cash flow in seven of the past 10 years. While this helped boost onshore production, it also led these companies to lose $100 billion in value and $36 billion in net income over that 10-year span.
OFS has also lost 65% of its value. Since 2014, there have been more than 200 bankruptcies in the sector.
Mr Wicklund noted that E&Ps and OFS companies have destroyed equity by not earning capital: “Without net income, our return on invested capital cannot be positive. If our industry – E&Ps and drilling – doesn’t learn, we won’t be profitable. We will no longer exist. Generating cash flow but having a negative number at the bottom of the income statement no longer works.”
Recovery from the downturn will likely require consolidation, particularly with E&Ps. Mr Wicklund estimated that upwards of 90% of Permian activity could be done by four or five E&Ps within five years’ time. OFS will also see some consolidation.
“We have a number of onshore drillers that have gone bankrupt, and some are in trouble. Consolidation in a market like that is very difficult, but it has to happen. Everybody knows it. We’ve been talking about it. The idea that we can have 27 drilling contractors or 37 pressure-pumping fluid providers working in one basin is not going to work going forward,” he said.
Further, ESG (environment, society and governance) will become a bigger driver of change as the industry recovers from the downturn. Operators that show a commitment to sustainability will have greater access to capital, Mr Wicklund said, as the investor community continues to place an increasing premium on reducing carbon emissions. In addition, OFS companies that do not embrace sustainability will find it “virtually impossible” to work for a major operator onshore, he said.
“If you don’t have a sustainability report that includes your ESG efforts, your cost of capital goes up. It’s not that ESG is unknown to us. We’ve been working on it forever, but the technologies that make ESG real are the technologies we need to embrace. We need to look at the technologies we use in our day-to-day operations and focus on that,” he said.