Last month, we reviewed Q1 through Q3 2021 earnings call themes from oilfield service companies. Commentary regarding the progress of ESG efforts, whether initiated by the OFS companies themselves or in support of their customers’ ESG programs, was prevalent throughout the year. OFS management teams also noted their anticipation of increased industry consolidation by way of M&A activity. Perhaps most poignantly over the first three quarters of 2021, OFS companies signaled increasing leverage in their ability to either start commanding higher prices of their customers, or the expectation they would be able to do so in the very near term.

In Part 1 of our Themes from Q4 Earnings Calls, we examined key topics among E&P operators, including:

• Projections of moderate cost inflation, typically in the upper single digits;
• Shifting focus towards liquids, including crude oil and NGL streams; and
• Industry headwinds stemming from macro energy policies in the U.S.

In Part 2 of our Themes from Q4 Earnings Calls, key topics among mineral aggregators included:

• Greater scrutiny and discipline regarding the execution of M&A deals;
• Expectations of relatively stagnant production in the near-term; and
• Greater insulation from price inflation relative to the impact on E&P operators.

With this background in mind, we focus this week on the key takeaways from the OFS operator Q4 2021 earnings calls.

Macro Headwinds

Labor shortages and supply chain constraints have been a common topic in the daily news cycle regarding the macroeconomic environment in the U.S.  Suffice it to say, the OFS industry has not been immune to these factors.

• “You know the story of tubulars people are struggling to get the right tubulars on time. They are having to make substitutions. We are seeing some rig efficiencies begin to deteriorate, which is attributable to several factors. Part of that, of course, is the basins. Different basins have different efficiency profiles. But I think our view is activities at the rig side have slowed down, all things being equal, strictly because of problems with personnel breakdowns. I think the industry is a bit stressed right now.” – Scott Bender, President & CEO, Cactus Wellhead
• “Beyond activity trends, we see a continuation of many of the same things from 2021. Operators will continue to look for ways to improve efficiency and sustainability. We see the current constraints in many critical areas such as labor, sand, and trucking also continuing for the near term.” – William Zartler, CEO & Chairman, Solaris Oilfield Infrastructure
• “Productivity and efficiency was broadly encumbered by 2 significant factors. First, the tightening labor market we faced in the U.S. was exacerbated by COVID outbreaks in certain plants during the fourth quarter. As skilled workers recuperated safely at home, their work was performed by less experienced, less efficient crews or by other skilled workers working overtime. Labor shortages led to higher product costs and scheduling headaches. Second, our manufacturing scheduling headaches were compounded by component and raw material shortages and late deliveries from our vendors who are facing the same sort of challenges that we are. Some businesses report supply chain challenges are getting a little better, but mostly these disruptions are persisting or getting more challenging in the near-term.” – Clay Williams, CEO, National Oilwell Varco

Industry Consolidation through M&A Activity

In our Q1 through Q3 2021 OFS earnings call themes post, we noted anticipation of greater M&A activity and industry consolidation in 2022. This continued in Q4, with the ongoing expectation of consolidation activity in the near future.

• “We have not given up on industry consolidation. That’s our number one priority. And importantly, I don’t think the industry has given up on industry consolidation. Yes, the valuations are going to be higher today than they were this time last year, but our currency is also more valuable today than it was this time last year. I don’t really consider that to be an impediment to getting a deal done. The impediment is finding the right deal.  …  Private equity has decided maybe now is the time to monetize after they’ve probably given up hope over the last couple of years.” – Scott Bender, President & CEO, Cactus Wellhead
• “As I’ve stated many times, I believe consolidation is very important for this industry. Through a combination of cash and stock consideration, we closed on the acquisitions of Complete Energy Services, Agua Libre Midstream, HB Rentals and UltRecovery during 2021. Additionally, we are set to close on the acquisition of Nuverra Environmental Solutions. In doing so, we’ve added nearly $300 million of run rate revenues to an already growing base business and acquired strategic portfolio of infrastructure assets, including gathering and distribution pipelines, disposal facilities, and landfill operations.” – John Schmitz, President & CEO, Select Energy

ESG Activity

The Q4 OFS earnings calls were peppered with commentary regarding ESG, including recognition of OFS operator initiatives from outside the industry, the mitigation of environmental impacts on local communities at present, and projections of continued demand for ESG-focused services.

• “We announced our science-based emission reduction targets, added 11 new participating companies to Halliburton Labs and were named to the Dow Jones Sustainability Index, which highlights the top 10% most sustainable companies in each industry.” – Jeff Miller, CEO, Halliburton
• “Overall in 2021, we recycled 25 million barrels that produced water through our fixed facilities, and we expect to continue driving these volumes higher. This recycling alleviates demand for freshwater sources in water stress regions, while also limiting waste disposal which is particularly important in areas of seismicity concerns.” – Nick Swyka, CFO, Select Energy
• “On the technology and sustainability front, we continue to advance our water recycling efforts. We’ve invested in six facilities during 2021 which are backed by long-term contracts. This sets the stage for a significant growth in our recycled volumes for 2022.” – John Schmitz, President & CEO, Select Energy
• “We’re busy upgrading Tier 2 fleets to Tier 4 dual fuel fleets that can utilize up to 85% natural gas. And we expect the pursuit of ESG-friendly operations, efficiency gains and the industry’s existing tired fleet of equipment will lead to continued demand for such rebuilds.” – Jose Bayardo, CFO, National Oilwell Varco

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 the Mercer Capital Oil & Gas Team for further assistance.