In our prior earnings call post, Themes from Q1 2024 Earnings Calls, we touched on how the Upstream (“E&P”) and Oilfield Services (“OFS”) segments emphasized their dividend and share buyback programs and the industry’s response to depressed natural gas prices. This week, we explore the Q2 2024 earnings calls of Upstream and OFS companies, highlighting the significance of this quarter’s themes across the entire sector.

Strong International Demand

The second quarter of 2024 saw robust growth in the international oil and gas market. Key industry leaders anticipate that this strong international performance will continue, driven by both high export levels and increasing global demand.

E&P

• “In the second quarter of this year, the U.S. set a new weekly propane export record at 2.34 million barrels a day. Looking at the broader trend, export volumes have averaged above 1.7 million barrels a day on a quarterly basis since the fourth quarter of last year which is higher than the annual average in 2023.  The start of the third quarter has been lower due to the impact of Hurricane Beryl on the Gulf Coast export docs this July, but we expect propane export numbers to recover and surpass previous quarters as we move through the remainder of this year. The high export levels we are seeing in the market are testing the maximum threshold of U.S. dock capacity, particularly in the U.S. Gulf Coast.”
  – David A. Cannelongo, Senior Vice President of Liquids Marketing & Transportation, Antero Resources Corporation
• “The overall macro environment remains constructive. Global oil demand continues to increase after a seasonally soft first quarter and is in line with our forecast.”
  – Ezra Y. Yacob, CEO & Chairman, EOG Resources

OFS

• “Q4 will be the highest international quarter we have… with software sales and tool sales. But day in and day out, we’re continuing to grow, and we’re very focused on profitable growth. And as I think I alluded to earlier, my expectation is that we see a continuing march internationally of growth. And the oil price says that, our clients are saying that, my own project inventory is saying that.”
  – Jeff Miller, Chairman, President & CEO, Halliburton Company
• “While we may not have quite reached the bottom in demand for aftermarket parts and services in the North American completions market, demand from international markets continues to improve and should gain to more than offset sluggish demand in North America.”
  – Jose Bayardo, Senior Vice President & CFO, NOV, Inc.

Domestic Challenges from Natural Gas Prices

Upstream companies grappled with slowing oil supply growth.  Concurrently, the oilfield services sector experienced reduced activity levels and price pressures, reflected in a decline in manufacturing volumes and revenue. Despite these challenges, managers expressed cautious optimism for a recovery, driven by strategic adjustments and a projected rebound in demand.

E&P

• “As anticipated, domestic oil supply growth has moderated since last year as a result of consolidation in the industry and reduced drilling and completions activity stemming from industry capital discipline. Activity levels, as reflected in rig count indicate continued lower oil production growth through at least mid-2025. We expect lower 48 U.S. supply to exit 2024 at roughly the same level as year-end 2023, with only modest gains to total U.S. oil supply from offshore… Regarding North American natural gas… inventory levels moved closer to the 5-year average, and we expect this trend to continue due in part to supply curtailments and increasing year-over-year demand. We remain optimistic on the long-term outlook for gas demand beginning in 2025, as a result of additional LNG capacity coming online and continuing increases in demand from electricity generation.”
  – Ezra Y. Yacob, CEO & Chairman, EOG Resources
• “The recent softness in natural gas pricing is occurring despite record high summer natural gas power burn that has exceeded even the most optimistic forecast. Higher imports from Canada where storage levels are nearly full combined with extended downtime at LNG facilities has resulted in storage levels that are still historically high at over 400 Bcf above the 5-year average. With that said, the surplus in inventory has shrunk by over 200 Bcf since March, and our constructive outlook for 2025 remains relatively unchanged. We continue to believe low rig counts combined with an upward step change in demand will support a continued tightening of inventories and lead to higher prices in 2025 and beyond.”
  – Justin B. Fowler, Senior Vice President of Gas Marketing & Transportation, Antero Resources Corporation

OFS

• “With the continued decrease in overall industry activity levels, we saw a roughly 9% decline in our manufacturing volumes during the quarter rather than the modest growth we anticipated. Accordingly, the decreased volumes resulted in a lower absorption rate through our manufacturing plants, delivering slightly lower gross margins of 16.4%.”
  – Chris George, Executive Vice President and Chief Financial Officer, Select Water Solutions, Inc.
• “Certain of our North American oilfield service customers are facing more price pressure as fleet utilizations fall and most are increasingly cautious about their purchases, which led to an 8% decline in Energy Equipment revenues for the region year-over-year and drove North American mix down to 25% of segment revenue in the second quarter of 2024.”
  – Clay Williams, Chairman, President & CEO, NOV, Inc.

Technological Innovations

Recent technological developments continue to enhance drilling precision and operational efficiency. These advancements promise to improve productivity and reduce costs across the sector. Oilfield services companies are also integrating new technologies to streamline traditional processes and address environmental concerns.

E&P

• “(If) you look ahead for 2 to 3 years… (the highest potential productivity improvement will) be in the downhole sensing technology that allows the bit to stay in the best rock, the highest percentage of time. And then on the completion side, understanding using downhole sensing where you can place the most frac energy in the most efficient way that creates the greatest stimulated rock volume. And these sensing technologies are — they’re evolving very, very rapidly. We’re — I think before too long, we’ll be able to actually sense in front of the drill bit and drill towards a target rather than drilling past it and making adjustments. And that sounds like a small change, but I think the sensing technology that’s — we’re right on the cusp of having some of those problems solved is going to be a real game changer for our industry.”
  – Travis Stice, CEO & Chairman of the Board, Diamondback Energy Inc.
• “And if you ask me how flowback has been done in the past, the conventional flowback is kind of analog, manual cost-intensive, lots of emissions. And the technology that we have developed completely transforms that. So we’re very, very excited about the solution that we offer. It’s from an environmental standpoint, from a cost standpoint, automation, safety standpoint… And we expect (our proprietary technology AutoSep) to be a more meaningful contributor to the 2025 opportunity for us. On the CNG side of things… we have a technology that we have developed in-house that uses this geobaric energy to produce compressed natural gas without any mechanical compression. So it’s cost effective. From an emission standpoint, it’s terrific. And a lot of folks are looking for a solution like that, where we have constraints on pipes and how you get a power energy solution in the form of CNG to different industrial applications.“
  – Ravi Srivastava, President of New Technologies, CNX Resources
• “Over the last several years, we have developed in-house artificial lift optimizers for several functions, including gas lift, plunger lift and rod pump operations. These state-of-the-art optimizers use algorithms to automate the set points of artificial lift and cost factors that allow for real-time adjustments to maximize production and reduce interruptions of third-party downtime. These cross-functional efforts by our production, marketing and information systems teams continue to improve and pay dividends.” 
  – Jeffrey R. Leitzell, Executive VP & COO, EOG Resources

OFS

• “The performance is leading in terms of efficiency and technology, and we continue to invest in technology that differentiates Halliburton. And that’s one of the key things… maximizing value in North America means that we’re very targeted about what we do, what we invest in, where we spend money and on those things that we know will create differentiation. And clearly, technology is one of those key areas. And not technology for the sake of technology, but targeted technology that can solve for automation, that can solve for subsurface understanding and measurements, direct measurements.”
  – Jeff Miller, Chairman, President & CEO, Halliburton Company
• “We think steadily rising market demand in key offshore and international markets dormant for a decade plus, together with these technology-driven operating efficiency initiatives, new products and technologies we are bringing to the market and further cost improvements are the prominent features that will guide NOV’s journey to better margins and returns.”
  – Clay Williams, Chairman, President & CEO, NOV, Inc.

Conclusion

Mercer Capital has its finger on the pulse of both the upstream market and the oilfield service space. 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. This includes E&P operators, mineral aggregators, and ancillary service companies crucial to starting and maintaining the stream’s flow. For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.