Moody's: Steep upstream capex drop weakens outlook for global oilfield services and drilling industry

The global oilfield services and drilling (OFS) industry is entering a deep, protected cyclical downturn as exploration and production (E&P) companies cut spending in response to the plunge in oil prices, Moody's Investors Service says in a new report. The rating agency's outlook for the global oilfield services and drilling industry therefore remains negative.

Moody's outlooks reflect its view of fundamental business conditions in a given industry over the next 12 to 18 months.

"Our negative outlook for the global OFS industry reflects the steep decline in upstream E&P spending we expect over the next year or so," says Assistant Vice President -- Analyst, Sajjad Alam. "Oil prices will remain weak in 2015, with overall E&P spending down about 25% over last year's levels as a result."

Upstream spending reductions will hit OFS companies' earnings with a lag, Alam says in "Weak Oil Prices and Deep Upstream Spending Cuts Will Prolong Pain" and credit metrics will deteriorate across the board. If oil prices average $55 a barrel this year, OFS companies' aggregate EBITDA will be down 25%-30% over 2014 levels, while prices below $45 a barrel would drag EBITDA down more than 35%.

"No segment of the oilfield services and drilling industry will be immune to E&P companies' spending reductions, but the strain will vary by subsector and geography," Alam notes. "Well-diversified companies with high-quality assets, superior technology, some contractually protected revenue backlogs and well-capitalized customers will cope more easily."

The "big three" OFS companies, namely Schlumberger, Baker Hughes and Halliburton, will remain the strongest through the downcycle, Moody's says. Paragon Offshore and Hercules Offshore will see the sharpest decline in earnings as contracts expire on their mostly older-generation jack-ups. Meanwhile, Transocean and Diamond Offshore Drilling have the most older-generation floating rigs rolling off contracts through 2016.

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