Often when I am out and about doing interviews, I find there’s a common question that I will ask everyone that month, usually reflecting on the current state of the industry. Over the last two months, the question has revolved around oilfield services companies raising the rates they charge oil companies.
For almost everyone I’ve spoken to since the New Year, the past six weeks have been the busiest they’ve seen in the last two years. Companies are hiring again. Some have had to bring up their formerly-reduced wages in order to attract workers again, but most are still working at reduced wages. Everyone is working at reduced rates.
In late November, 2014, Saudi Arabia indicated it was going to open up the taps and let oil prices drop. Oil prices fell off a cliff and haven’t reached anywhere near that level since. Two weeks later, Canadian oil companies sent letters to their vendors demanding cuts in their rates. Since then, as oil dropped from the US$75 per barrel range to the US$26 per barrel level by January and February of 2016. We were used to US$100 oil for several years prior to that.
Over that time, many oilfield services segments saw multiple rounds of cuts. Four is not an uncommon number, but I think a few saw even more than that. Oil companies ground their vendors hard as they no longer had much in the way of cash since their product was now down up to 75 per cent in value. I’ve even heard of oil companies demanding their vendors show the oil companies their books. One person told me that was “obscene.”
Those oilfield service companies reduced expenses every way they could. Of the people I’ve spoken to over the past year, a typical number is they’ve reduced their staff by about half compared to 2014 peak levels. Those who remained saw little or no over time and most had their wages cut. These companies have been in survival mode for a long time, and a few didn’t make it.
Of the survivors, most are now operating with their rates at a level set when oil was floating around the US$30 per barrel mark. The thing is, oil has been sitting above the US$50 mark for three months now. This is key, as many people have said we would need oil at this level for a sustained period to get the activity level to pick up again.
So the oilfield services companies may be working again, and they may be hiring again, but most are a long ways from making any sort of real money again. They have two years of depleted capital to make up for; two years of often-deferred maintenance. For many trucking firms, if a unit had a significant breakdown, it was parked beside the fence and the license plate was pulled.
Next to no one has spent money on new capital purchases for more than two years. Only in the last few weeks have I laid eyes on brand new equipment being purchased and put into the field.
These oilfield service businesses are all chomping at the bit to raise their rates again. They’re not expecting the heydays of the boom leading up to 2014. But they would at least like to dial back the last round or two of rate cuts. The oil companies have benefitted from the increase in oil prices, and the vendors want to see some of that benefit, too.
The difficult thing is how to go about it. If you are in a sector where there is lots of competition, it’s going to be mighty hard to be the first to tell an oil company, particularly a big one, that you are reducing your discount. They may just go to someone else. The first nail sticking up might get hammered down, and leave the company in a worse position than it was before.
For the oil companies, there’s not a lot of incentive to encourage their vendors to charge a little more. If those vendors are working for rates appropriate for US$30 oil, and your oil company is now getting US$52, then you get to improve you balance sheet significantly.
Will we see a change after spring breakup? Time will tell. Some people told me they don’t expect to be able to raise their rate this year at all – which would extend the downturn for them to three full years. That’s brutal, and unfair.
Most people seem to think we’ve been through the worst of this down cycle, and they would like to be able to breathe a little bit. They’re absolutely right. The tough thing is how to go about doing it, without losing the work you already have.
Brian Zinchuk is
editor of Pipeline News.
He can be reached at
