The recent oil price jump could lead to further momentum for service sector margins, according to Rystad Energy. Namely, 60% of the top 50 oilfield service (OFS) contractors already improved margins and increased operational efficiency in the first half of 2019.
On average, the peer group recorded an EBITDA margin of 15.2% in the first six months of the year, in comparison to 14.6% in the same period last year.
This is a pleasant trend within the upper echelon of the oilfield service industry after years of misery. The OFS fraternity, having been hit so hard by the oil price collapse in 2014 and 2015, began to see revenues rise again in 2017, fueled in general by improved oil prices, but in particular by the enormous increase in drilling activity in the North American shale sector
stated Lein Mann Hansen, an analyst on Rystad Energy’s oilfield service team.
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What is more, the North American shale market rebounded, posting an astonishing 71% increase in drilling and completion (D&C) capex in 2017, as well as another 32% in 2018. This development was expected to slow, with annual expenditures forecast to fall in 2019 and stay at lower levels in 2020.
Lein Mann Hansen added that:
Shale euphoria is wearing off, but service company margins are still resilient. Margins of companies focused on well services and commodities hit bottom in 2016 at 6%, but the sector responded constructively, not allowing costs to grow faster than revenues and enabling margins for well services and commodities to rise again amid skyrocketing investments in US shale. As a result, margins doubled again by 2018
Now, as we approach third-quarter reporting, Rystad expects that margins of service companies significantly exposed to North American shale could remain flat y/y. In fact, if the recent hike in oil price continues into the fourth quarter, increased activity could further enhance service pricing.
On the other hand, service companies operating within the offshore space will only experience the limited effect of a rise in oil price, but are still expected to slowly grow margins.