S&P Global Ratings lowered its outlook for oilfield services majors Schlumberger Ltd. and Halliburton Co. to negative amid challenging industry conditions that drove weaker-than-expected financial performances in the first quarter.
While the rating agency reaffirmed Halliburton's issuer credit and senior unsecured ratings at A- and kept its rating on short-term and commercial paper at A-2, it lowered its issue-level rating on Schlumberger's senior unsecured debt to A+ from AA- and lowered its short-term and commercial paper ratings to A-1 from A-1+.
Improvement in the international markets and a stabilizing U.S. completions market in the second half will not be enough to counter the permanent efficiency and productivity gains realized by the exploration and production companies and investor sentiment calling for producers to live within cash flow and limit production growth, S&P Global Ratings said in separate notes issued May 24.
As evidence, the Ratings analysts pointed to record U.S. crude oil production despite a U.S. oil-directed rig count at nearly half the 2014 level.
Data from Baker Hughes, a GE company for the week to May 24 showed 797 crude oil rigs in operation, compared to 1,528 during the corresponding week in 2014. Meanwhile, crude oil production in the seven key production regions in the U.S. is expected to total 8.46 million barrels per day in May, the U.S. Energy Information Administration said in its May 13 Drilling Productivity Report.
"These factors are clearly trickling down to the oilfield services industry, reducing demand for products and limiting the ability for price increases given the current oversupply of equipment," the rating agency said.
S&P Global Ratings left Schlumberger's business risk unchanged, reflecting its large scale and scope of operations, its competitive advantage, and its profitability, considered "superior to that of its peers."
Because Schlumberger generates nearly two-thirds of its revenue from outside of North America, it stands to benefit more quickly than its peers from an anticipated 5% to 10% ramp-up in international drilling activity this year, the analysts said.
Halliburton also benefits from its global reach and diversified product offerings. Nevertheless, its significant exposure to the volatile, shorter-cycle North American market adds to cash flow volatility, viewed as a weakness versus Schlumberger.
Schlumberger is not immune to the slowdown in exploration and production activity and elevated pricing pressure in North America, S&P Global Ratings said. An anticipated decline of at least 5% to 10% in capital expenditure by North American E&P companies this year could result in an associated decline in Schlumberger's margins.
The outlook was based on a $55 per barrel crude oil price in 2019 and beyond as well as a Brent crude oil price of $60/bbl this year and in 2020 and $55/bbl thereafter.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.