Global oil and natural-gas producers are shelving $200 billion of investment in more than 45 projects following the slump in crude prices, according to a new Wood Mackenzie report. The report excludes the North American shale industry, where Wood Mackenzie counted another $83 billion in delays thus far.
Predictably, nearly all of the cuts come from high-cost production methods. For instance, more than 50% of the deferrals are focused on deep-water projects while another 30% stems from Canadian oil sands projects.
Goldman also issued a report in July stating that lower oil prices will probably disappoint the U.S. petroleum industry’s hope of a drilling recovery in the second half of the year. The U.S. land rig count fell 60% from its peak last October. The world’s top four oil field service companies have either cut or planned to cut 58,000 jobs this year in response to the collapse of crude prices.
The stocks of all major oil servicing companies have cratered with falling oil prices including: Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), National Oilwell Varco (NOV), Weatherford International (WFT), Cameron International (CAM), FMC Technologies (FMC), Oceaneering International (OII), Core Laboratories (CLB)Â and Superior Energy Services (SPN).
Still, between now and 2020, we will need to find 23 million barrels of oil equivalent per day of new oil reserves, to replace the decline of existing production plus meet the steady increase of demand. Of those 23 million barrels per day, a growing percentage will come from more service-intensive areas such as shale and offshore drilling. This means that demand for oil services will continue to grow over the long term, and with that service providers can charge more for their services and expand margins.
Looking at the production cost breakdown from a Chevron (CVX) presentation, nearly every form of oil exploration is unprofitable right now. Companies will still churn out solid volumes to cover variable costs, but discovery and new rig servicing is nearing multi-decade lows.
While oil demand by 2020 needs to be met by new supply, it’s unlikely major companies will be reinvesting back into capex in a meaningful way until oil passes the $60 market. If you expect that to happen over the next year or two, it may be time to invest in some of the fallen oil services companies listed earlier. If you anticipate the current sub-$50 oil price for some while, these companies would be in a world of pain, as it’s unlikely much production will be added until prices correct.
