Where now for Oilfield Services? The Impact of Turmoil in the Credit Markets
With increasingly frequent mention of recession and credit markets shutting up shop it was inevitable that oil prices would turn south. At present, oil markets are focused solely on demand and playing a waiting game to see how the situation unfolds with respect to economies that have driven recent demand growth such as China.
Oil supply constraints are currently not the topic of focus yet real constraints remain and could bite again and much harder if investment in new field developments and maintenance of existing wells is hit. Some 66 countries are now past peak production (compared to 52 in 2002) and one of the world’s largest producers, Russia, is now facing a future of production decline. Could the world see oil production peak in the next five years?
What will be the short-term impact on projects? In our view this is a function of the source of project finance. Without doubt the oil majors have considerable cash reserves – the smaller players’ projects offer less certainty and they may themselves be the subject of a new round of M&A.
In the case of the contractors and oil field service companies, like most other sectors, their stock prices have fallen in line with wider markets. However, many have a very large work backlog which should carry them through short-term oil price difficulties.
And what of OPEC? With precious little spare capacity, while demand surged, the key swing producer Saudi Arabia now has three times as many rigs working than five years ago. The immediate question becomes not “how much can be pumped” but instead “how will OPEC members act to support prices?” What ‘floor’ in oil prices will the organisation seek to defend?
The bottom line is that our view is pretty much unchanged – oil & gas is not for short-term positions. It is a long-term play and for such players very large business opportunities lie ahead.
Andrew Reid, CEO
