Oil rally fails to boost drilling as services firms are squeezed

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

Brent benchmark prices are up 53% from February 27, the day before U.S. and Israel began 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 operations due to idling rigs, slower crew mobilisation, rising insurance and logistics costs, and a reduction in utilization.

Rystad estimates that the Gulf's offshore rig count has dropped by?39%, to 72 rigs, since March 27.

The consultancy firm has stated that there were a total 118 offshore drilling rigs in the region prior to 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 'permanent' closure of the Strait of Hormuz will have a severe impact on crew mobilization in the region, as well as creating logistical challenges and higher 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 its first-quarter revenues to be below expectations. It also expects a loss of 6-9 cents per share 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 region in the past years also face the squeeze. Borr Drilling, based in the UK, put four rigs at standby in Saudi Arabia, Qatar and the UAE, and evacuated its staff from one location.

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

"If the war continues, then the second quarter is not good."

REBUILDING LAGGING SEEN

The?conflict' is currently affecting the activity, but it will support future demand.

Oilfield service providers, engineering firms and oilfield service companies 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 capacity. Repairs are expected to take between three and five years. Baker Hughes CEO Lorenzo Simonelli said that the company is ready to assist QatarEnergy in assessing the damage.

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)