Barometer of Shale Oil Industry's Health Warns Agony to Worsen

 

A 70 percent drop in crude prices since mid-2014 has affected not only NOV but dozens of others throughout North America's oil patches, prompting tens of thousands of layoffs, eroding profits, depleting state and local tax revenue and, in a handful of cases, causing bankruptcies.

 

As a manufacturer of rig equipment and a designer of robotics for onshore and offshore oil fields, NOV serves as a barometer of oilfield activity, giving added weight to warnings on Wednesday as it reported a quarterly loss.

 

"We are not planning for recovery in 2016," NOV CEO Clay Williams told investors.

 

He painted a grim financial picture of his exploration and production clients, which can't hedge production because futures prices show oil won't rise above $50 a barrel for years.

 

"Oil (has) traded into the high $20 range, levels not seen since 2003. This, combined with hedges rolling off for E&Ps, and term contracts expiring for drilling contractors, ratcheted up financial stress on our customers," he said.

 

The Houston-based company's commentary comes as part of a parade of pain the oil industry has put on display so far this quarterly earnings season, one that shows no sign of abating as others report in the coming days.

 

Several producers have already slashed spending by half or more, hurting services and equipment companies.

 

Last year, many operators managed to lift output as they devised new ways to pull more oil from fewer wells, but many have run out of tricks and money is tight.

 

In a telling sign that this year overall shale oil output may slip more than last year, Continental Resources (CLR) has said it will pump about 10 percent less oil this year.

 

Before the latest round of spending cuts, the U.S. government was already projecting domestic crude output to fall by about 8 percent by the end of 2016 to around 8.5 million barrels per day, a decline that would come even as offshore platforms in the U.S. Gulf of Mexico start after years of planning.

 

The mood is so somber that Richard Mauck, the publisher of online shale forums, sent a missive to readers on Wednesday titled "Has Shale Broken Your Heart?"

 

Paal Kibsgaard, CEO of top services firm Schlumberger NV , on Jan. 22 said negative market sentiment has intensified.

 

"The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain and prompted operators to make further cuts to already low E&P investment levels," he said of fourth-quarter results.

 

Schlumberger has laid off an unprecedented 34,000 people, or 26 percent of its workforce, since November 2014.

 

Halliburton Co CEO Dave Lesar said clients were so skittish that the company would "take this market week by week and in some cases crew by crew."

 

Things are so bad that some companies have been rewarded by investors for suggesting, or even saying outright, that they may cut dividends.

 

Anadarko Petroleum Corp on Monday hinted strongly that spending $550 million each year on a dividend payout might not be the best use of cash, an announcement that normally would agitate shareholders but in this case gave them heart as a sign executives were taking steps to preserve the balance sheet.

 

"Obviously there are other things we could do with that cash," Anadarko CFO Bob Gwin said. Anadarko's shares are up more than 10 percent since the news was announced.