HAL Halliburton Co

By Alison Sider 

Oil-field-services companies are depleted after slashing prices and laying off workers, and their slow recovery could crimp the energy industry's overall ability to bounce back from the oil bust.

The workhorses of the energy sector, the services companies, which range from giants such as Schlumberger Ltd. to small family-run operations, provide much of the muscle and specialty know-how needed to extract oil and gas. They pioneered the technologies that allowed producers to unlock massive volumes of oil and gas trapped in shale-rock formations, and marshal critical equipment and people to drill and pump wells from remote corners of North Dakota to platforms miles offshore.

But they have borne the brunt of two years of belt-tightening in the oil patch, leaving them short on cash and manpower as prices slowly rebound and companies need them again to increase production. IHS Energy estimates that nearly 70% of fracking equipment in the U.S. has been idled, and 60% of field workers involved in fracking have been laid off.

Roe Patterson, chief executive of Fort Worth, Texas-based Basic Energy Services Inc., which fracks wells in the Permian basin and other shale formations, said shortages of experienced workers could hamstring a recovery in its early days. Many of the thousands laid off have found other jobs, and the best will have to be lured back with higher wages that companies can ill-afford, he said.

"It's scary to think what a drag and what a headwind finding experienced labor is going to be this time around," Mr. Patterson said, adding that while his fracking fleet is still in good shape, a lot of equipment isn't. "Pop the hood on your car and let it sit for a year. I guarantee the car won't be in the same condition."

Larger and better-financed oil-field-services companies were better positioned to weather the drop in business and are now poised grab market share from smaller competitors that had to make deeper cuts, analysts said.

Halliburton Co. has laid off more than 28,500 workers -- one third of its labor force. But the company has been careful to hold on to employees with specialized skills, said Lawrence Pope, executive vice president of administration and chief human resources officer.

And Halliburton has experience adding to its ranks quickly when labor markets are heating up: In 2014, when services companies were still trying to staff up in order to meet demand, Halliburton hired 21,000 people in a single year.

"In the upturn, we become a recruiting machine," Mr. Pope said.

Schlumberger, the world's largest oil-field-services company, has said it offered many senior field engineers and certain key operators an "incentivized leave of absence" at half pay, which will allow it to call workers back in batches over the coming months.

But oil companies hoping to start producing again may find that the low costs they have come to count on aren't going to stick. Services companies have said their prices have been pushed to break-even levels that they can't sustain.

"Most service companies are now fighting for survival with both negative earnings and cash flow," Schlumberger Chief Executive Paal Kibsgaard recently said. "The cost savings from lower service pricing should largely be reversed when activity levels start picking up."

Smaller firms are being pushed to the brink. Robert Drummond, chief executive of Key Energy Services, a Houston-based company that works on wells, said in May that producers will have to accept higher prices in order for the firms to get back to work.

For Key Energy, those higher prices can't come soon enough: it disclosed on June 15 that it was in discussion with lenders about a potential prepackaged chapter 11 bankruptcy filing and restructuring. Its shares have fallen to 22 cents from $9 when oil prices peaked in 2014. Key Energy officials weren't available for further comment.

Since the beginning of 2015, more than 70 services firms have filed for bankruptcy -- nearly half of them since the start of this year, according to the law firm Haynes & Boone LLP.

Seventy Seven Energy Inc., a services company spun off from Chesapeake Energy Corp., filed for chapter 11 bankruptcy protection last month -- handing the company's equity over to bondholders and wiping out more than $1 billion in debt.

Some customers are getting nervous that the most indebted oil-field-services firms could be too risky to hire, said Stephens Inc. analyst Matthew Marietta. That could set off a downward spiral for the companies and make bankruptcy a more urgent prospect.

As prices rebound and activity picks up, the race to hire back workers and repair equipment will put more strain on services companies' already stretched finances. As things stand, only handful are in good enough shape to step on the gas if called to, said Piper Jaffray Cos. analyst Bill Herbert.

"I don't think the industry yet realizes essentially how arduous this recovery could be," he said.

(END) Dow Jones Newswires

July 07, 2016 05:44 ET (09:44 GMT)

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