start of the Biden administration, it was apparent that energy
derived from hydrocarbons was on the way out, to be quickly replaced by
renewables and clean energy alternatives. The government and environmental
groups were convinced that an energy transition could be accomplished with
unproven/under-scaled technology, catastrophic climate-change rhetoric, and pressuring
authorities to restrict and/or ban leasing and drilling activities. The tactics
worked and created an unprecedented reduction of investment in
hydrocarbon-based energy, in favor of developing unreliable clean energy.
Renewables leave Texas shivering. Texas experienced a major failure of
its power grid in February 2021, which led to multiple weather-related deaths.
The failure was caused primarily by placing green politics over energy
reliability/security. Texas Railroad Commissioner Wayne Christian outlined the
recklessness of putting climate change politics above energy reliability. “One
night of bad decisions would not have had such devastating consequences, had it
not been for decades of poor policy decisions prioritizing unreliable renewable
energy sources at the expense of reliable electricity,” Christian stated.
Oil and gas spending skyrockets on
security concerns. However, power-hungry politicians that put their political agenda
over energy security have triggered a surge in oil and gas investments.
But the uptick may be temporary, and service companies should capitalize now
before the focus returns to the energy transition according to Rystad Energy. After
Russia invaded Ukraine, expected investments in fossil fuels in 2022 and 2023
surged by $140 billion. Before the war, the two-year total was projected at
$945 billion, but as the war sparked shortages and sky-high prices, expected
spending surged to $1.1 trillion, Fig. 1.
Shale focus. Of the $140 billion growth, shale production attracted most investment, with an
additional $80 billion increase as activity climbed 30%, and pricing for
oilfield services jumped nearly 50%. Offshore production accounted for $40
billion in growth, while other onshore activities expanded by an additional $20
billion. “Service companies should make the most of this upturn now, while
keeping one eye on the future. The energy transition is not slowing. Large investments
in renewables and clean technology are imminent. To ensure their long-term
success, OFS companies should adapt their offerings to capitalize fully on the
inevitable green push,” says Rystad analyst Audun Martinsen.
sudden need for more rigs and completions, combined with increased greenfield
sanctioning, was so strong that the oilfield supply chain could not meet the
record demand for services and equipment that emerged in shale, offshore and
conventional markets. As a result, service prices rose, and 50% of the
additional spending resulted in a five-percentage-point increase in suppliers’
profit margins, rather than more activity.
concerns have unlocked significant additional investments in oil and gas,
boosting spending forecasts and sending the expected timing for peak oil demand
out in time. The first wave of extra spending over the past 15 months mainly
went to oil and gas, while low-carbon industries faced a slowdown, due to high
inflation and shortages in the supply chain. But low-carbon spending is
expected to recover. The U.S. Inflation Reduction Act and Critical Raw Mineral
and Technology Act in the EU will strengthen the investment cycle brewing in
the renewable and clean-technology sectors.
companies benefit. SLB, Baker Hughes and Halliburton are on course for
strong financial performances in the coming quarters, after the trio of major oilfield
services giants all experienced excellent results for the first quarter of 2023,
says Rystad V.P. Binny Bagga. All three
companies posted improved topline numbers, margins and cash flow in the first
quarter, compared to the same period a year earlier. Following a similar
strategy to E&P operators, the trio have focused on returns to shareholders
and increasing dividends, with two launching a share repurchase plan for the year.
security being a priority for most countries, and supply chains’ remaining
capacity constrained on many fronts, analysts believe market fundamentals
necessary for OFS companies to boost their financial performance will remain
strong for the rest of the year. This aligns with previous analysis
highlighting the revenue growth potential and margin improvement trend expected for the OFS sector
as a whole in 2023.
revenues. The three OFS majors all posted robust results for this year’s
first quarter and saw steady growth year-on-year (y-o-y), Fig. 2. The
companies’ results revealed new highs in first-quarter revenues, with upstream
revenues for both SBL and Halliburton close to levels not seen in the first
quarter in the four previous years, while for Baker Hughes said they were at
their highest in eight years during the first quarter.
first-quarter revenues increase 30% y-o-y, fueled by growth in the well
construction and production systems segments, which both saw 30% growth, Fig.
3. This was fueled by price increases in North America and Latin America,
with both regions witnessing 45% growth in the well construction segment. The
onset of increased drilling demand was also evident in Halliburton’s revenues,
with the company posting over 30% y-o-y growth in the first quarter, supported
mainly by the completion and production unit, which was 45% higher, as demand
for pressure pumping services increased, sales for completion tools improved,
and Kuwait and North American onshore saw improved need for artificial
demand for drilling-related services globally saw Halliburton’s drilling and
evaluation segment post 17% y-o-y growth. Baker Hughes also posted good
results, with revenues surging 18% y-o-y in 2023 but remaining flat from last
year’s fourth quarter. The growth in revenue from last year’s first quarter was
based on higher volumes across the oilfield services and equipment and
industrial and energy technology business segments.
margins. Along with the increase in revenues, all three companies also
benefitted from an improvement in both their adjusted earnings before interest,
tax, depreciation and amortization (EBITDA) margins and net income margins.
This was driven by capacity constraints in many service segments within the
service industry, along with some general easing of inflation and an increase
in service prices.
Cash flow. All the three companies reported significant improvements in cash flow from
operations (CFO) relative to the same period last year, with Halliburton’s CFO
growing 500%. Additionally, the companies have made incremental capital
expenditures in their businesses. With a full-year capital budget of between
around $2.5 billion and $2.6 billion, SLB spent $410 million in the first
quarter of this year alone. The company also launched a share buyback program,
with repurchases totaling $200 million-worth of shares. Added to that, the
company paid $249 million in dividends to shareholders. Overall, SLB targets a
total return of $2 billion to shareholders in dividends and share buybacks.
What Paris Agreement? China permitted
more coal power plants in 2022 than at any time in the last seven years,
according to a report by the Centre for Research on Energy and Clean Air. That’s
the equivalent of two new coal power plants/week. The Global Energy Monitor reported that China
quadrupled the amount of new coal power approvals in 2022, compared to 2021. The
coal power capacity starting construction in China is six times as large as
that in all of the rest of the world, combined.
Common sense approach. It’s
perfectly clear that China, India and Pakistan have no intention or interest in
curbing their carbon emissions. Because of this fact, net-zero goals are clearly
too aggressive and are jeopardizing global energy security. Thankfully,
industry leaders are increasing investment in oil and gas reserves while we
develop and build cleaner-energy alternatives and technologies. WO