The oil industry is facing ‘a full-scale’ crisis

Stop me if you’ve heard this one before: the oil industry is in some serious trouble.

Prices have plummeted due to a global oversupply and many companies are facing mountains of debt, loads of expenses, and cratering profits.

If you’re looking for some good news on the industry, you should look elsewhere. Schlumberger CEO Paal Kibsgaard laid out a disastrous forecast for the sector in the company’s quarterly earnings call.

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis,” he said. “We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels.”

While oil prices have increased, they are still low by historical standards so many companies are curtailing production activity.

This is especially bad news for Schlumberger since the company provides services and equipment to support drillers. Thus, as the number of rigs in the US continues to hit new lows, there is little need for the support services.

Here’s Kibsgaard again (emphasis ours):

The start of a new year and a new budget cycle represented a further fall in customer E&P spend, and we expect continued weakening in the second quarter given the magnitude and erratic nature of the ongoing activity disruptions. This outlook is backed by the latest 2016 E&P spending surveys, which indicate sharper falls than earlier figures. Global spending reductions in 2016 are now approaching 25%, corresponding to a fall of 40% to 50% in North America and around 20% in the international markets.

This is bad news for the Schlumberger, but it could be a glimmer of hope for the rest of the industry. With demand only growing incrementally, the best way to get prices back into profitable territory is to decrease supply. Theoretically, this means decreasing rig counts and hurting Schlumberger.

The problem is that oil inventories, the amount actually being pumped, are still insanely elevated. New technology is also making old wells more efficient, so even as companies decrease the number of wells they can still pump more.

Deutsche Bank

Another solution for the supply glut would be some companies simply going bankrupt, thus shuttering drilling sites. No so fast, said Mark Durbiano, senior portfolio manager of high-yield debt at Federated Investors.

“While you will continue to see more bankruptcies in the energy space, oil prices should remain low and the industry is going to remain under pressure,” Durbiano, who oversees $51.1 billion in fixed income assets, told Business Insider.

“But even if a company is bankrupt that doesn’t mean the company is going away, or the drills are going away. If anything, those companies are going to have more incentive to drill more in order to generate enough cash to pay their debtors.”

So even if these companies go belly up, or close to it, there will be desperation drilling to cover as much of the debt as they can. For his part, Durbiano doesn’t see oil getting anywhere close to its old prices. He expects it to settle around $55-$60 a barrel.

Outside of the US, OPEC and other producers were unable to come to a production freeze agreement in Doha on Sunday. And going forward, producers such as Iran and Libya have had pumping decrease in recent months, but could come back to full strength soon.

All of this adds up to Kibsgaard’s pessimism, and an “unprecedented” outlook for the oil industry.

Business Insider