- Easing service costs will test oil producers’ discipline on keeping output in check the next time crude prices run up.
According to Bloomberg article published on April 28, 2023, US shale appears to be catching a break on service costs, just at the right time.
Cost inflation, spanning everything from frack gear to laborers, is moderating after running white-hot for the last two years. A drop in natural gas drilling is freeing up rigs, trucks and materials for oil fields like those in the Permian Basin. Halliburton Co., the biggest provider of shale services, is relocating crews.
In the past week, Baker Hughes Co. and SLB, the other two major service companies, warned that producer spending will grow less than expected. Helmerich & Payne Inc. is seeing a drop in demand for rigs. Lium, a research firm, said bids for fracking have slipped more than 20% since January.
Halliburton was more bullish, with Chief Executive Officer Jeff Miller saying his company could defend its pricing power and that “quality services will remain tight.” But investors were less sure, with the stock failing to register a bump despite the highest first-quarter profit in more than a decade.
An expected wave in shale M&A may also free up services. Nowadays, buyers typically slow production growth to preserve future drilling locations. A case in point: After announcing a $4.3 billion takeover of EnCap Investments LLC assets earlier this month, Ovintiv Inc. said it would cut the number of rigs on the acquired acreage to two from seven.
It doesn’t mean that oilfield costs will immediately come down, but it’s a sign that inflation — previously running at 10% to 15% annually — has passed its peak.
This is important for two reasons.
First, it’s much-needed good news for US oil producers under pressure to meet last year’s buyback and dividend pledges even as crude prices dip down below $80 a barrel due to worries over economic growth.
Second, the availability of equipment means that producers now have the option to grow if they want to. To date, much of the sector’s successful “discipline” strategy has been enforced not just by investors, but by the lack of oilfield services and the extremely high cost of adding extra rigs.
The next time crude prices run up, that discipline may be tested.
