Weatherford’s struggles highlight the larger service industry challenges

By Loren Steffy

It wasn’t supposed to end this way.

Back in May 1998, when Weatherford Enterra merged with EVI Inc., the combined company hoped to crack the market dominance of Halliburton, Baker Hughes and Schlumberger, the triumvirate that controlled the oilfield services market.

Over the past two decades, the company, which became known as Weatherford International, charged through a long list of acquisitions, piling up debt as it shoehorned its way into the top of the industry.

The Big Three became the Big Four, but for Weatherford, the cost of joining the industry’s top tier proved too much. It filed for bankruptcy in early July.

At the time of its filing, its $7.6 billion debt was 20 times bigger than its meagre market value of $367 million. The company’s demise stemmed from its ambitious growth, but it underscores the wider struggles among oilfield services companies.

Weatherford’s financial woes had been mounting for years. The company hasn’t posted a profit since 2011, its revenue fell by two-thirds in the past five years and its current employment of 26,500 is less than half what it was in 2013.

As is often the case with a serial-merger strategy, Weatherford struggled to integrate all the companies it acquired. At first, it was able to mask the problems with burgeoning revenue numbers and an expanding market share. For a time, the company attracted contracts worldwide by offering an alternative to the Big Three. Its shares, which traded at almost $15 after the Enterra merger peaked at almost $50 a decade later.

But the crude price decline in 2014, in which oil plunged from more than $100 a barrel to less than $30, exposed its internal problems.

While Weatherford may be an extreme example of hardship in oilfield services, it isn’t the only one. In the five years since oil hit bottom, the business has been struggling with crude prices that have remained stubbornly modest. Service companies are usually the first to feel the cutbacks as oil prices fall and producers scale back drilling operations. Drilling contractors typically discount during such times, then increase prices during the recovery. But in the past five years, as crude prices rebounded, producers grew more efficient and cost-conscious, which kept service company margins under pressure.

As a result, the contractors jockeyed for market share, ploughing more capital into new equipment in the expectation that demand for drilling would return at some point. But in places like the white-hot Permian Basin, the most active U.S. oilfield, producers’ drive for efficiency is change the demand picture. They’re using longer laterals in horizontal drilling and other technological advances that allow them to extract more oil from fewer wells. What’s more, as the race for new discoveries in the Permian has slowed, companies have adopted a manufacturing-like approach. This, too, reduces demand for contractors, and it also plays to the financial strengths of large producers like Exxon Mobil. Because of their size and financial strength, these companies can demand better prices from contractors or, in some cases, handle their drilling operations themselves.

It’s little wonder then that equipment is piling up in pipe yards around the country. The number of available fracking pumps, one of the most expensive pieces of equipment on a modern drill site, exceeded demand by 68 per cent at the end of last year, according to the consulting firm Rystad Energy.

The number of active rigs in the U.S. has declined even as production has surged. In June 2014, just before prices collapsed, 1,545 rigs produced 8.4 million barrels of oil. In June 2019, U.S. production hit a whopping 12.2 million barrels — 45 per cent more than five years ago — yet only 788 rigs were running, a reduction of 49 per cent.

Some companies, including Weatherford and Schlumberger, have been selling off businesses in hopes of generating better returns for investors. In fact, in the past five years, the benefits of rising production have flowed disproportionately to producers at the expense of drilling contractors. Ten years ago, services firms’ return on capital was more than 13 percentage points higher than producers. Today, it’s 7 percentage points less.

And while the increase in U.S. production is impressive — it’s expected to rise by another 1.4 million barrels a day this year — America isn’t the only oil-producing nation boosting output. Countries such as Norway, Brazil and Canada are all expected to increase production next year, according to the International Energy Agency. All of this comes in the face of slowing global demand for crude and growing signs of an economic slowdown. OPEC’s agreement to curtail production is the only thing standing between U.S. producers and another price rout.

Meanwhile, Weatherford is hoping its pre-arranged bankruptcy filing will enable it to shed debt and make it more competitive. The company has been selling assets for several years, but it wasn’t enough to forestall bankruptcy. Facing interest payments of $553 million on its debt this year, and $2.6 billion worth of notes coming due in 2021, it reached an agreement with creditors that, if approved by the bankruptcy court, will allow the company to swap $5.8 billion of its debt for equity in the reorganised company.

Once out of bankruptcy, Weatherford is likely to focus on areas that set it apart from its larger competitors, such as its offshore business and artificial lift systems that enhance oil and gas recovery. It’s one of only two companies — Franks International of Houston is the other — that sell specialised pipe for underwater wells.

It’s too early to tell if the strategy will succeed, especially with producers under pressure from Wall Street to cut spending even further. Weatherford’s dreams of becoming one of the biggest in its business didn’t pan out. Now, it needs to focus on what it does best and develop a new strategy for surviving in the rapidly-changing, and financially austere, market for services.