The common themes among E&P operators and mineral aggregators’ in the Q3 2022 upstream earning calls included expanding business segments internationally, long-term sustainable growth for OFS, and production growth plans. In our most recent blog post, Themes from Q4 2022 Earnings Calls, Part 1 Upstream, prevalent themes from E&P companies included dividend distribution, organic growth, and management optimism regardless of upcoming economic challenges. This week we focus on the key takeaways from oilfield service operators’ Q4 2022 earnings call.

OFS’s Positive Growth Outlook

Many OFS companies noted a positive expectation for continued growth in their businesses. Common themes of increased margins, along with thoughtful capital investment planning to keep up with the discrepancies between current supply and demand, were prevalent. All operators expressed excitement to see what 2023 has in store for OFS.

• “Looking ahead, we expect strong activity and anticipate customer spending to grow by at least 15% in 2023. The market for equipment is tight. Lead times for new and replacement equipment remain long and service companies remain disciplined… This is the best setup and market outlook for oilfield services and Halliburton that I have seen in a very long time.”
  – Jeff Miller, Chairman, President & CEO, Halliburton Company
• “We invested $81 million in capital expenditures to support the strong demand, which helped drive a near tripling of adjusted EBITDA to $84 million in 2022 and a fourth quarter exit rate approaching $100 million… As we think about our plans for 2023, we will continue investing in growth capital that creates positive returns for our business.”
  – William Zartler, Founder, Chairman & CEO, Solaris Oilfield Infrastructures, Inc.
• “We continue to see a tremendous amount of interest from our customer base around contracting new infrastructure development, particularly around full lifecycle solutions and I see a number of opportunities for additional growth this year. The additional stability provided by these initiatives, acquisitions, projects and contracts give us incremental optionality in our capital allocation strategy. Accordingly, I am proud to have initiated our first-ever quarterly dividend during quarter four 2022. Having just paid our second-ever dividend last week, I look forward to building and enhancing a solid track record of returning capital to shareholders as a component of our overall capital allocation framework”
  – John Schmitz, Founder, Chairman, President & CEO, Select Energy Services, Inc.

Supply and Workforce Constraints Come into Play

In the Q4 2022 earnings calls, many companies recognized the constraints they would face as expected demand remains strong. Supply and workforce constraints were most common between operators as the discussion on how to face these challenges arose. Navigating these constraints will be a key point in the year to come as operators focus on increasing positive returns.

• “On the supply side, in the U.S., an increased spend of almost 50% and activity growth of nearly 30% yielded a production increase of about 5%… On the demand side, we saw the resilience of oil and gas demand throughout 2022, even as central banks raised interest rates to combat inflation. I expect oil and gas demand to remain strong.”
  – Jeff Miller, Chairman, President & CEO, Halliburton Company
• “Every upcycle shares some common trades. The cutting of maintenance expenditures and laying off of hard-working oilfield employees during down-cycles creates an urgent need to rebuild capabilities and teams and iron as we first enter an upcycle. But never before has this industry faced the constraints we face today. From raw materials to finished components to workforce to freight to availability of capital to higher interest rates to hostile political pressure and tightening regulations, pivoting back to growth will be as daunting as it ever has been throughout the industry’s 164-year history. I’m convinced that these extraordinary constraints will elongate this upcycle. They will take many years to overcome. But we simply must overcome them to restore the critical energy security required for economic growth and improving living standards, particularly for those living in energy poverty. That’s why I’m so very proud of the NOV team.”
  – Clay Williams, Chairman, President & CEO, NOV, Inc.
• “The supply chain is actually sort of returning to some normalcy. There are pockets of it that are still problematic, elastomers, resin material, things like that. It’s available… I think the challenge there is maybe light sailings. But if you prepare yourself and you have contracts like we do, there should be no disruption in terms of getting the product.”
  – Joel Bender, Senior Vice President & COO, Cactus, Inc.

Keeping an Eye on Dipping Commodity Prices

Coming into a new year, a number of earnings calls looked at the potential results of the short-term swings in commodity prices. Most firms acknowledged that the dip in prices is expected to have some impact in the near-term such as delayed completions by E&P’s, above all else, lower natural gas revenues. Mercer Capital examined some of these macroeconomic challenges in our post Themes from Q4 2022 Earnings Calls, Part 1 Upstream.

• “From a macro perspective, we are keeping our eyes on commodity prices, particularly recent natural gas price weakness. This weakness has driven a decline in gas directed drilling activity and we expect this will have an impact on gas directed U.S. completion activity in the near term.”
  – Kyle Ramachandran, CFO & President, Solaris Oilfield Infrastructures, Inc.
• “As you know, our core customers tend to be larger, well-established oil producers who are less reactive to short-term swings in commodity prices. Nonetheless, we’re prepared to deal with the impact that lower natural gas prices will likely have on the industry, particularly in the Haynesville, an area weighted towards privates.”
  – Scott Bender, CEO, Cactus, Inc.
• “On the natural gas side, with prices coming down, we’ve seen a material increase in conversations around pipeline solutions and recycling because they’re going to be more efficient. And so it’s a way for the operator to reduce their AFEs and LOE expense. And on the recycling side, whether it’s natural gas or oil, we do think this is a secular trend and something that we’re going to continue to see kind of – obviously, it will pick up and slow down somewhat, but regardless of activity.”
  – Michael Sharke, EVP & COO, Select Energy Services, Inc.

Mercer Capital has its finger on the pulse of the OFS operator 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 a member of the Mercer Capital Oil & Gas Team for further assistance.