In our most recent earnings call blog post, Themes from Q3 2023 Earnings Calls, Part 1 Upstream, prevalent themes from E&P companies included discussions about consolidation in the industry, a focus on efficiency of operations, and strong production volumes throughout 2023. This week, we focus on the key takeaways from OFS operators’ Q3 2023 earnings call.

Rebound in Activity Following Bottoming Numbers

In their Q3 earnings calls, many OFS executives reported a drop in activity levels in recent months. The consensus is that the activity levels have reached their lowest point this year in Q3 and will remain relatively stable going into Q4. However, executives expect a positive change in the market dynamics in 2024 and beyond due to healthy commodity prices, budget resets, and global demand.

• “Looking ahead, we hold a similar view to other industry observers who believe the rig count is close to its bottom and we anticipate increased activity levels in 2024 as customer budgets reset. The tight global supply and demand balance suggests a constructive oil and gas market and our early conversations with customers have been positive.”
  –Stuart Bodden, CEO, Ranger Energy Services, LLC.
• “With drilling and completions activity appearing to be bottoming, along with the benefit of a more robust commodity price environment than we saw over the last couple of quarters, we believe that 2024 will resume upward momentum in other parts of the business.”
  –Nicholas Swyka, Senior Vice President & CFO, Select Water Solutions, Inc.
• “Consistent with this outlook, we expect continued demand growth for oilfield services in 2024 and beyond. Everything I see today strengthens my conviction in the long duration of this upcycle. Against this backdrop, I believe the execution of our strategy will deliver strong free cash flow, growing margins and more cash returned to shareholders.”
  –Jeff Miller, Chairman, President & CEO, Halliburton Company

Merger and Acquisition Activity Ramping Up

The oil and gas industry faces a new era of consolidation and efficiency as global energy demand shifts and environmental challenges grow. A vast amount of M&A activity in the exploration and production (E&P) segment is witnessed by many OFS operators who believe this to be a chance to acquire a larger market share or generate greater returns. Whichever the case may be, a consensus of a healthy outlook is ahead.

• “Furthermore, the recent major consolidation announcements in E&P indicate both a positive long-term view of North American resource development and an opportunity for the highest-quality service providers to continue to gain market share. We are observing an increasingly prevalent trend among our customers to consolidate their service providers, which holds positive implications for Ranger’s business, particularly as we look forward to recovery in rig activity going into 2024.”
  –Stuart Bodden, CEO, Ranger Energy Services, LLC.
• “Today, the market is more consolidated, more focused on returns and more focused on free cash flow generation. We see the benefits of this change. Customers assign value to technology and efficiency and the service industry is rewarded for returns rather than growth.”
  –Jeff Miller, Chairman, President & CEO, Halliburton Company
• “As there’s continued consolidation, you’re entering into a more sophisticated buying decision, if you will, with the larger operators. And many of them looking for sort of nationwide service providers.”
  –Kyle Ramachandran, CFO & President, Solaris Oilfield Infrastructures, Inc.

Companies Look to Make Capital Returns a Key Focus

As there is believed to be a rebound in activity, opportunities for market share acquisitions, and strengthening capital returns, numerous OFS operators indicated an increase in shareholder returns in their third-quarter earnings calls. Many have announced they have set a framework in place for this substantial return of free cash flow and future steps for their shareholders.

• “The framework we announced included returning at least 25% of free cash flow to shareholders through a quarterly dividend and/or share repurchases. No other small-cap oilfield service company has the fundamental strength and confidence in its business to be able to offer this kind of shareholder returns program.”
  –Stuart Bodden, CEO, Ranger Energy Services, LLC.
• “The normalization of supply chains and working capital intensity should enable NOV to generate meaningfully positive cash flow and position us to begin returning more capital to our shareholders.”
  –Clay Williams, Chairman, President & CEO, NOV, Inc.
• “Earlier this year, we committed to a long-term framework for enhancing our existing shareholder returns program by returning at least 50% of free cash flow through dividends and share repurchases. As part of this enhanced returns framework, we raised our dividend twice to $0.12 from $0.105, reflecting a 14% year-over-year increase.”
  –William Zartler, Chairman & CEO, Solaris Oilfield Infrastructures, Inc.

Mercer Capital has its finger on the pulse of 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, including the ancillary service companies that help start and keep the stream flowing. For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.