Share This Article
The oilfield equipment and services (or OFS) industry encompasses all products and services associated with the oil and gas exploration and production process, i.e. the energy industry’s upstream sector. In general, these businesses manufacture, repair, and maintain equipment used in oil extraction and transportation.
When most people think of an oilfield services company, they think of seismic testing, transport services, and directional services for horizontal drillers, in addition to well construction and production and completion services. Check out on inclusive oilfield services in Malaysia here.
However, the OFS umbrella includes a diverse range of products and services, including many technology-based services critical to successful field operations. Locating energy sources, managing energy data, drilling and formation evaluation, geological sciences, and other services fall into this category.
OFS providers emerged in their modern form as a result of a combination of factors dating back to the late 1990s oil price slump and the mega-mergers of BP-Amoco in 1998 and Exxon-Mobil in 1999. Mergers of this size enabled logistics synergies as well as asset restructuring and optimization.
While the benefits of these mergers were obvious in the downstream segment, the impact on the upstream segment was less clear. Indeed, in-house ownership of these various types of services created inefficiencies and redundant cost centres, making it costly to provide necessary upstream services without negatively impacting the bottom line.
At its core, the revenue of the OFS companies is a function of the E&P companies’ capital and operating expenditure, which is governed by current and future expectations of the price of oil and natural gas.
Of course, other factors come into play (advances in technology, climate, seasonality of spending, availability of financing, political factors, and so on), but ultimately, supply and demand balance and market fundamentals determine incentives for these companies to invest. The following is a non-exhaustive list of leading indicators used to assess the outlook and demand in the OFS sector:
- E&P Capital Expenditure Budget
- The size of capex budgets will ultimately determine how the OFS industry as a whole performs. Typically, E&P companies will begin drafting capex budgets for the following year in the fourth quarter of the current year. Many companies will then use quarterly earnings calls and press releases to announce their future spending plans, strategy, and quarterly/annual results to the market. These calls and news releases are frequently scrutinized as a leading indicator of future demand. However, prior to the 2014 oil price collapse, large companies tended to overspend, whereas companies at the end of 2018 were tight on capex budgets, even in rising oil price environments.
- Rig and Well Counts
- The active rotary rig count has historically been one of the most closely watched indicators of the level of demand in the OFS industry. Baker Hughes has been publishing the North American active rig count weekly since 1944, and the monthly international rig count began in 1975. Historically, rig counts have been regarded as a business barometer for the drilling industry and its suppliers. When drilling rigs are operational, they consume products and services produced by the OFS industry.