Halliburton Company: Our Customers Will Soon Face a Drill or Die Future
Oil-field service kingpin Schlumberger sees two clear trends emerging: Oil prices will rebound in 2016, but oil-field service activity will not. That's largely due to Schlumberger's view that drillers will begin to hoard cash when oil prices rebound and, in doing so, will push back the oil-field service activity rebound until 2017. That said, Halliburton made it clear that it sees something entirely different, which is that oil and gas activity will rebound right alongside oil prices. That's because it believes that if its customers don't drill, then they'd have to dismantle the growth-focused companies they've spent billions to build.
Drill or dieCEO Dave Lesar elaborated on this view during the company's third-quarter conference call after an analyst asked if $60 oil would be enough to drive a recovery in drilling activity. In response, Lesar said:
Lesar believes that drillers are being conservative right now, but they can't remain this conservative forever because shale production declines steeply if not enough wells are drilled. A company likeEXCO Resources is a perfect example of this. Over the past year, EXCO Resources' production has declined 6% largely due to the fact that it isn't completing enough wells to keep production flat. It's a target that will become even harder to hit after the company recently slashed its capital expenditures spending by $100 million to just $70 million through the first six months of next year. That spending rate is insufficient for the long term, suggesting that if EXCO Resources doesn't start to drill more wells, its production will trail off quite steeply.
Once production starts to meaningfully decline it makes the infrastructure these companies built up, such as future drilling inventory or long-term, fee-based takeaway contracts with midstream companies, much less valuable to that company. Given this backdrop, Lesar continued by saying:
In other words, in order to keep their companies intact, Lesar believes that drillers would, contrary to what Schlumberger thinks, drill instead of using that cash for other options such as paying down debt. He also believes that banks will be lenient, especially if oil is north of $60 a barrel by the end of next year, which isn't all that of a stretch given how lenient banks have been during the downturn. Given that leniency, drillers won't need to reduce leverage just to appease the banks.
Investor takeawayBecause so many shale producers are in a drill-or-die mode hoarding cash is not an option. That's why Halliburton expects them to reinvest any excess into new wells because the current investment rate isn't going to keep production flat forever. Not only that, but a lot of producers have assets -- such as land and infrastructure -- that would need to be dismantled if not used because the internal value would erode away and that's not something producers would want to see if they have the money to prevent that from happening.
The article Halliburton Company: Our Customers Will Soon Face a Drill or Die Future originally appeared on Fool.com.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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