Oilfield Service Sector Set for Wave of Restructurings
While most industries face the need for large numbers of restructurings cyclically, for the oilfield service industry restructuring events have been ongoing for the last five years. Even before the dual shock of COVID-19 related demand destruction and the Saudi/Russia led price war the industry was already facing challenging conditions, driven by overcapacity and low pricing. Many companies’ balance sheets were severely over levered, including companies that had already completed chapter 11 restructurings in 2015-2017 with the expectation that demand and pricing would rebound quickly but were now faced with growing liquidity issues as the recovery failed to materialize as strongly or quickly as projected.
2019 and early 2020 saw a number of major restructuring events such as Weatherford, Key Energy Services, McDermott International, Superior Energy Services, Shale Support, EPIC Companies, Offshore Marine Contractors, Pioneer Energy Services, Tri-Point, and Carbo Ceramics. Prior to the current crisis another round of restructuring was imminent, with a large number of private and public OFS names seen as restructuring candidates. Now, OFS companies across the space have appointed advisors, an early sign that the dam is beginning to break.
For an industry already facing tough conditions, the dual hit of COVID-19 and related demand destruction and the OPEC / Russia alliance’s increase of supply has both accelerated likely restructurings and put in play companies that even the most pessimistic projections would not have foreseen. Realistically, in 2020-2021 the oilfield service sector will see, if not the largest ever, certainly the second largest ever number of bankruptcies after the mid to late 80’s bust. The third factor, and perhaps in the long run the most impactful, is the growing realization that U.S. unconventional activity levels as seen in 2016-2018 were never sustainable. The U.S. shale industry despite trumpeting 100+ percent single well rate of returns in reality has led one of the most efficient bouts of capital destruction in living memory. Having destroyed hundreds of billions of dollars while at the same time being the leading creator of its own demise, as US oil production continued to grow offsetting any production cuts by the OPEC+ group and pushing the group over the brink and into all-out war with each other and the shale industry.
While the reaction of OPEC+ and the decline of US shale was certainly foreseeable, the dual hit of demand and supply disruption was not. With the outlook for the global economy continuing to worsen, storage filling up and commodity markets continuing to shrug off any seemingly positive news it is clear that the near-term outlook for the industry is bad, and worsening. What does that mean for the OFS industry?
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