The largest energy services companies are set to benefit from a focus on oil drilling in the US as the shale oil boom in North America continues, analysts at Barclays claim, even as drilling for natural gas in shale – largely an “efficiency game” – becomes commoditized.
Much has been made of the boom in development of both oil and natural gas fields in the US, stemming from advances in the efficiency and deployment of hydraulic fracturing. That technological advance has created a price dynamic that weighs on the very industry that has taken advantage of it, while comparatively high global oil prices have made drilling for crude – a more complicated business – more attractive.
That leaves the “big three” – Halliburton, Schlumberger and Baker Hughes – set to profit from their comparatively strong intellectual property positions, a recent analyst note from investment bank Barclays said.
“While pressure pumping in the gas plays is largely an efficiency game (sheer horsepower) with low barriers to entry, the oil plays have proven to be considerably more complex and more technology driven,” Barclays analysts said in the note, which detailed a sunny future for Halliburton. “[The] breadth of service offerings, intellectual property, patents and technology of the Big Three…have created significant barriers to entry in the oily basins that should protect margins better than we’ve seen in prior gas-driven cycles.”
Halliburton has kept up the push for technology-driven efficiency in the meantime, potentially also aiding its sustained push for higher margins. The company has a digitization strategy for its huge paperwork and compliance processes called “Battle Red” that is largely complete and replaces a paper-driven process.
In the field, Halliburton has also been working to roll out a “frac fleet” of drilling operations that can run on a combination of CNG and diesel; the move could save the oil services industry $1.6 to $2.3 billion each year as more-expensive diesel fuel is replaced. The next horizon for the frac fleets is using field gas, a move that could take the current $3.8 billion-$4 billion cost of fueling the fleets with diesel to nearly zero.
Fundamental market strength is also playing its part in boosting results for Halliburton and other oil field service giants, Barclays noted. A host of smaller-to-medium size international projects means the company doesn’t have to compete for enormous “make or break” projects and the sustained “oil renaissance” in the US should help reduce the volatility of traditional boom-and-bust project development in North America.
Watch this short video about the potential attractiveness of investing in oil services equities and those with exposure to the oil and gas drilling supply chain, based on recent industry trends.