High oil prices spurred by increased demand and Russia’s invasion of Ukraine spelled record profits for the oil and gas industry last year, but analysts are not expecting that bounty to flow as fully to the oil field services sector, which will start reporting fourth quarter and full year 2022 earnings on Friday.
Oil field services businesses such as Houston-based Halliburton and Baker Hughes provide labor, technology and equipment such as drilling rigs to oil and gas operators, called upstream companies, which posted a standout 2022 with earnings of more than $800 billion worldwide. In the past, big profits for these operators has translated into more activity — and earnings — for the oil field services sector. That might not be the case this time around.
“(Upstream) companies have not expanded as fast as they otherwise might for a host of reasons,” said Karr Ingham, a petroleum economist for the industry group Texas Alliance of Energy Producers. “Some public companies, they’re just returning that (profit) to investors, rather than plugging it into expansion.”
The operators that do want to expand, Ingham said, are running into difficulties. Equipment can be hard to get, costs are increasing and companies say it’s more challenging to find qualified workers.
Demand for oil and gas came roaring back in 2021 after a dismal 2020 as the world accommodated the COVID pandemic. Prices rose as supply couldn’t quite keep up and climbed further with Moscow’s invasion of Ukraine in February 2022, driving oil prices to multi-year highs on fears that Russian oil would be lost to the market.
Meanwhile, U.S. investors burned by overspending in the shale boom of the last decade are telling upstream companies they want more money sent back to shareholders, demanding what they call “capital discipline” when it comes to setting production growth budgets.
This all led to a mixed bag of results for the oil field services companies in the first three quarters of 2022. Schlumberger, which recently rebranded as an energy technology company called SLB, led the pack, earning more than $900 million in the third quarter alone, and competitor Halliburton posted net income of more than $500 million in the same period. Baker Hughes lost money in the second and third quarters after taking a $365 million charge for exiting Russia, and announced a restructuring in September. Weatherford so far has posted modest profits, marking a turnaround from the company’s bankruptcy in 2019.
Even though upstream companies weren’t racing to add rigs as they did in previous oil booms, oil field services firms often found themselves sold out of equipment at times in 2022, partially due to supply chain issues, hampering opportunities for growth. A recent Dallas Fed Energy survey also found oil field services executives were still contending with rising costs and challenges finding workers.
“Attracting and retaining labor remains our most significant and intractable challenge,” one oil field services executive wrote in the comments section of the survey. “Despite wage and benefit increases, retaining newly hired labor is difficult.”
As oil field services companies earnings begin to roll in this week, with SLB set to report Friday morning, analysts say they’ll be watching to see how they navigate supply chain issues, labor shortages and increasing costs.
“We will want to hear what level of price increases were achieved during (year end) contract tendering, the degree inflation has impacted input costs — and expectations for both (in) 2023,” Mark Chapman, senior vice president of intelligence for oil field services at the data firm Enverus, said in an email. “We will be listening for announcements for net new equipment (rigs/crews particularly) to be put to work to ease the OFS (oil field services) supply constraints, and in the same vein, guidance on supply chain and labor challenges easing or persisting in 2023 for North American land.”
