In a prior post — Themes from Q4 2021 Earnings Calls, Part 3: OFS — we noted common themes from OFS companies’ Q4 earnings calls, including macro headwinds, industry consolidation through M&A activity, and ESG activity.

In Themes from Q1 2022 Earnings Calls, Part 1: Upstream, we explored key topics among the upstream segment of the oil & gas industry through the earnings calls of E&P operators and mineral aggregators.  These themes included:

• The future role of U.S. production in the European market as European nations plan to phase out Russian oil & gas;
• Confidence of continued favorable pricing exhibited through shorter-term deals and unhedged positions;
• Increasing completion rates in Q1, with expectations of further growth in completions beyond Q1.

This week we focus on the key takeaways from the OFS Q1 2022 earnings calls.

Short-Cycle Projects to Bolster Near-Term Production Are Those Most Sought After

OFS companies have highlighted that — as E&P companies remain focused on returning near-term profits to shareholders — their investment efforts are sighted on capitalizing on short-cycle developments, rather than longer-term developments.  Amid ESG headwinds and supply chain disruptions, OFS companies have been more commonly tasked with supporting active rigs, supplying marginal equipment, and other services necessary for E&P companies to capitalize on this commodity upcycle.

• “In addition, I expect an important change in our customers behavior and priorities will provide structural support to oil prices throughout this upcycle. I believe supply dynamics have fundamentally changed due to investor return requirements, public ESG commitments and regulatory pressure, which make it more difficult for operators to commit to long-cycle hydrocarbon investments and instead drive investment flexibility through short-cycle barrels.”
  – Jeff Miller, Chairman, President & CEO, Halliburton
• “The shorter cycle [is] catching up, improving the situation around our very, very constrained supply chain challenges [and] meeting sort of the near-term demand of supporting rigs, frac fleets and stimulation equipment…both land and offshore, I think that’s kind of the biggest near-term needle mover for NOV.”
  – Clay Williams, Chairman, President & CEO, NOV
• “There have been episodic supply chain disruptions with our customers, where we’ve been on location waiting for another service company to arrive or complete a job, and that’s becoming, unfortunately, more frequent. I think that you’re seeing a lot of marginal equipment being deployed and you’re going to see a lot more marginal equipment being deployed as we pass through the 700 level in the U.S. rig count on the way to maybe just under 800 by year-end.”
  – Scott Bender, President, CEO & Director, Cactus

 Shifting Priority to Margin Expansion

Though the demand for oilfield services has particularly revolved around short-cycle projects to support production, executives note that total demand for these products and services has still increased across the board.  Amid a plague of supply constraints and a tight market for their products and services, OFS companies have shifted their focus towards increasing margins, rather than gaining market share.  Despite a surge in demand, margins face pushback as inflation and rising wages erode the pricing power of OFS companies.

• “It’s probably fair to say that we’re entering into a period of potential meaningful margin expansion. And I think that volume expansion in terms of shipments is going to be constrained. And unlike some of our peers, we have the capacity to manage increased volumes. So we could potentially benefit from [this].”
  – Scott Bender, President, CEO & Director, Cactus
• “We are seeing increasing demand across all services. And I’d say, particularly on the well servicing side just because for a lot of operators, some of their cheapest incremental barrels are workover barrels. So we are seeing that demand. As Brandon indicated, we’re now running 157 rigs and we would expect through the year that, that number starts to kind of trend up. We are being pretty diligent in maintaining margins, but we do think we can deploy additional rigs and maintain margins.”
  – Stuart Bodden, President & CEO, Ranger Energy Services

Private Companies Have an Increasing Role Within the Customer Base

A recurring theme, as mentioned in previous blog posts, is how private companies have been more active than public companies in ramping up production.  As this relates to OFS, Q1 earnings calls have acknowledged that relationships with private operators are of greater importance than in the past.  This shift comes in light of capital restraint from public operators.  While perspectives differ about the future activity plans of the public E&P companies, OFS company executives commonly recognized increased activity from private operators, due to growth, consolidation, and greater capital freedom.

• “Our penetration of privates is undeniable. It’s going to increase this year because I think the privates are becoming much more sophisticated. They’re consolidating. And as they become more sophisticated and larger, then our product becomes far more attractive to them. They’re not nearly restrained from a capital perspective. And we’re doing our level best to call on those customers with whom it makes economic sense for us to pursue that business.”
  – Scott Bender, President, CEO & Director, Cactus
• “Today, as I look at a combination of customer activity and inflation, my outlook has improved, and I now expect North America spending to increase by over 35% this year. With respect to activity, over 60% of the US land rig count sits with private companies and they keep growing, while public E&Ps remain committed to their activity plans. Activity and demand for our services are increasing, both internationally and in North America.”
  – Jeff Miller, Chairman, President & CEO, Halliburton
• “As far as mix, I’d say it’s twofold. We referred on the call that we are working for larger group of operators and I’d say the preponderance of that increase is probably in the private side … so I think we will see growth in both sides, but two different dynamics driving this.”
  – Kyle Ramachandran, CFO & President, Solaris Oilfield Infrastructure

Mercer Capital has its finger on the pulse of the minerals market.  As the oil and gas industry evolves through these pivotal times, we take a holistic perspective to bring you thoughtful analysis and commentary regarding the full hydrocarbon stream, including the mineral aggregators with working and royalty interests in the underlying production.  For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.