Oil rally fails to boost drilling as services firms are squeezed

Oilfield services firms around the world are bracing themselves for a drop in earnings, as the Iran War?disrupts the energy infrastructure throughout the Middle East. Producers will hold off on new drilling until the higher oil prices have been proven to be durable.

Brent's benchmark price has risen 53% in the past two months, just one day before Israel and the U.S. launched their strikes against?Iran. This makes oil and gas projects much more profitable and increases demand for crews and rigs.

However, the Iran War has seen a drop in activity and a reduction in demand for oilfield equipment and services.

Igor Isaev is the head of analytical services at European broker Mind Money. He said that the situation for oilfield service companies was ambiguous. If producers don't increase their activity, a price hike alone won't lead to an increase in orders.

The Gulf of Mexico is experiencing a slowdown in crew mobilization, and rising insurance and logistics costs. This has a negative impact on operations and can delay projects.

Rystad Energy estimates that the number of offshore rigs, a good indicator of future production, had fallen by 39% in the Gulf as of 27 March.

The consultancy firm said that there were 118 offshore drilling rigs in the region as of February 28.

A growing number of security threats have made it harder to navigate the Strait of Hormuz. This has further complicated offshore drilling and equipment movements.

The closure of the Strait would have a severe impact on crew mobilization in the area, as well as creating logistical challenges and increased insurance costs. Lauren Mayhew is the head of MENA Research at Welligence Energy Analytics.

Earnings of Companies are Hit

Oilfield service firms have felt the immediate impact of the decline in activity in the Middle East and the caution shown by producers around the world.

The U.S. producers who gathered in Houston for the CERAWeek Conference this week said that oil prices must remain high for several months to justify adding more rigs.

SLB, a leader in the industry, expects a first-quarter revenue that is below expectations. Earnings per share will also be affected by 6-9 cents after demobilizing and suspending operations in the Middle East.

SLB, Halliburton, and Baker Hughes are the three companies with the most exposure to the Middle East. However, smaller competitors who invested in the area?in the recent past also face the squeeze.

Borr Drilling, based in the UK, put four drilling rigs at standby throughout Saudi Arabia, UAE, and Qatar and evacuated its staff from one location.

Richard Spears, vice-president of oilfield consultancy Spears & Associates, stated that the revenue generated by oilfield services in the Middle East may fall between 10% and 20% in 'the first quarter.

The second quarter will be a disaster if the war continues.

REBUILDING LAGGING SEEN

The conflict is affecting the current activity, but it will also support future demand.

Oilfield service companies and engineering firms are typically responsible for the repairs of refineries once export routes have been restored.

Rystad Energy estimates that the cost of energy infrastructure repairs in the Middle East has reached $25 billion.

Karan Satwani, an analyst at Rystad Energy, said that "damage to Gulf energy infrastructure would generate a meaningful demand for oilfield service...?this could lead operators to prioritize repair and maintenance for existing fields before awarding contracts for new developments."

QatarEnergy CEO said that the Iranian attacks knocked out about a sixth (or $20 billion) of Qatar's LNG export capability. Repairs are expected to take between three and five years.

Baker Hughes CEO Lorenzo Simonelli said the company is ready to assist QatarEnergy in assessing the damages.

Welligence Energy’s Mayhew stated that "Additional repairs and maintenance of damaged facilities in the area will result in an additional demand for OFS firms. The extent to which this occurs will however be heavily dependent on the broader market conditions as well as the firm's allocation of capital."

(source: Reuters)