European suppliers to the oil industry, hit by their customers’ spending cutbacks over the past two years, have produced stronger than expected second-quarter earnings and are cautiously pointing to signs of recovery in demand.
These companies, which encompass oil drillers, engineering groups, oil services providers and seismic surveyors, have had to slash jobs, costs and investments to cope with the fallout from a 60 percent drop in the oil price since 2014.
The tide may be turning now the oil price has stabilized but any recovery for these companies will be uneven because those that find it tough to cut capacity and costs will lag others with more flexible business models.
“The oil price has gradually increased since it bottomed out in January, indicating a turning tide for the oilfield service industry expected in the second half of this year,” consultancy Rystad Energy said.
“This will be the last quarter with double-digit drop, and we may see revenues beginning to increase in the third quarter this year.”
Challenges remain, however, including the level of spending by oil companies. This week BP and Statoil said their capital spending would be lower this year than planned. While shell has already made significant cuts earlier in the year.
Consultancy Wood Mackenzie estimates the world’s top 56 oil and gas firms have cut 2016 exploration and production spending by 49 percent or $230 billion relative to 2014 levels.
Goldman Sachs said in a research note that the industry’s investment cycle was nearing a trough, which was a positive for oil services.

PANIC OVER
The more positive outlook has been supported by the oil service industry’s second quarter earnings.
On Thursday, Subsea 7, specializing in underwater construction, produced second-quarter earnings 46 percent above a mean forecast in a Reuters poll, due to lower-than-expected costs.
Likewise, French oil services firm Technip on Thursday raised its 2016 objectives for this year after reporting stronger than expected results.
Schlumberger, the world’s biggest oilfield services provider, said last week it was considering rolling back pricing concessions negotiated with oil firms, in a sign of confidence in future demand.
“In spite of the continuing headwinds we now appear to have reached the bottom of the cycle,” CEO Paal Kibsgaard said when he presented results last week.
PGS, which maps the seabed for oil and gas deposits, sees higher activity and spending by oil companies next year and that 2016 would be the low point in the cycle. “We see early signs of a stabilising market and improving sentiment,” its CEO Jon Erik Reinhardsen said last week, when PGS reported forecast-beating earnings.
“PGS confirms what we have seen from oil companies and other market players; the panic is gone,” Swedbank analyst Teodor Sveen-Nilsen said.
Oil services firm Aker Solutions said cost-cutting efforts across the industry are taking hold, with project break-even costs coming down. “This may enable some major projects to be sanctioned in the next 12-18 months,” the group said.

NO EASY ROAD BACK
But the road back to bumper profits will not be easy and there will be winners and losers.
Analysts mostly have “buy” recommendations for Technip and Schlumberger, according to Thomson Reuters data, but there is little consensus elsewhere.
“In terms of what might start recovering earliest, it’s more likely to be company-driven, — ie. a service company grabbing the situation by the horns and actually doing something about it. So Technip-FMC, Schlumberger-Cameron, potentially others,” Canaccord Genuity Alex Brooks said.
“What will definitely not recover anytime soon is pure-play asset companies, those where margins are more or less directly linked to asset rates, or those where capacity is incredibly difficult to actually take out — like Seadrill, Transocean, Vallourec, Fugro, Subsea 7, or Saipem,” Brooks said.
Saipem, one of Europe’s biggest oil contractors, beat expectations with its second-quarter results on the back of an improving order backlog but still had to cut guidance for the year, citing delays in the awarding of contracts due to low oil prices.

“The industry is still crossing the desert,” Saipem CEO Stefano Cao told analysts on Wednesday.
“They (Technip and Saipem) are very different businesses. Saipem is an asset rental business and Technip is more a service and consultancy business,” Canaccord Genuity’s Brooks said.
“Saipem is aspiring to very large projects while, as Technip pointed out this morning, no-one wants to do big projects.” he said.

Source: Arab News