Oil field services struggle in oil glut

Added 11th January 2016

2016 looks set usher in tougher times for oil field services companies, industry sources say.

Oil field services struggle in oil glut

The first week of the year is already proving difficult for oil field services providers as penny-pinching exploration-and-production firms cut their spending amid sinking revenues and weak outlooks. 

Data from FE Analytics show that equity funds with more than 20% allocation to oil and gas equipment services are posting unspectacular returns over a three-year period.

The top performing fund, the Morgan Stanley Global Infrastructure fund, has a 9.5% return, while the bottom-performing fund, AXA World Funds Framlington Junior Energy A, is clocking in a return of -45.06%.

A look at the three-year trailing performance of the six funds available in Asia:

According to data from oilfield services provider, Baker Hughes, which was released last week, the US oil rig count dropped to the lowest level in five years as more rigs were put on idle.

"You have to look quite a long way along the oil curve to find prices for future delivery that are materially above where prices are today"

Drillers idled a total of 963 rigs, the first annual cut since 2002 and the biggest decline since 1988.

Mark Burgess, Colombia Threadneedle’s CIO, noted in late December: “We will continue to monitor the oil price closely. At current prices, higher-cost producers and some of the more marginal shale producers are losing money, but some will keep producing in order to generate cash flow.

“Indeed, you have to look quite a long way along the oil curve to find prices for future delivery that are materially above where prices are today. It is therefore likely that we will see some of the weaker and higher-cost producers fail next year. Energy is a meaningful component of the US high yield universe, so this is something that investors need to watch,” Burgess said.

Viktor Nossek, Wisdom Tree’s director of research, added that crude oil service providers would continue to succumb to weakness and volatility as the outlook for global energy remains deeply uncertain.

“Low crude oil prices mean large energy players will attempt to squeeze out smaller rivals by increasing production and market share. Overall, output in crude oil for 2016 is expected to increase as a result, albeit at a slower rate than in 2015,” Nossek said.

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