By Mella McEwenMRT.com/Midland Reporter-Telegram

A very different-looking oilfield service sector is expected to emerge from the aftermath of the COVID-19 pandemic and ultra-low commodity prices.

“The impact is going to be dramatic,” said James Wicklund, managing director, Stephens Inc. last week during a weekly webinar on issues impacting the oil industry. The webinars are presented by Grant Swartzwelder, president and owner of OTA Compression LLC, OTA Environmental and Kimark, along with the Permian Basin Petroleum Association.

“We had the rig count drop by 700 rigs in the last 12 months, from 948 or so to 266. That has to be one  of the fastest drops in history,” Wicklund said. “(That) is the lowest in recorded history and the lowest since Abraham Lincoln was president.”

He predicted the rig count decline hasn’t bottomed out quite yet but is close. He expects some operators who had discontinued their drilling programs entirely to bring a few more rigs into service The rig count, he said, should reach bottom in the next couple of weeks and then see an anemic recovery the rest of the year.

“We’re actually completing DUCs (drilled, uncompleted) wells now,” he said. “We’ve spent several years compiling a DUC inventory. People were wondering what it would take for that inventory to be worked down; prices are low enough now, and the futures price strip is such, that drilling new wells is not a good idea but completing wells for half the price is a good idea.”

 Jim Whiteley, owner of Texas J&A Services, said his company has been challenged by the impact of the COVID¬-19 pandemic and downturn in the industry, just like other companies have.

“We’re trying, and we’ve been working on projects,” he said during an open house to show off some new products the company has developed. One is a new low-pressure flare that is 99.9 percent efficient. Also on display was a SandCat, which captures all the volatile organic compounds emitted during drill out.

States like Colorado are already making their emissions regulations stricter, and Whiteley predicts Texas will follow suit in the next couple of years “and we want to be ahead of the game.”

It and its sister company, Precision Service Equipment, manufacture pressure vessels – separators, treaters and flares.

During the downturn, he said the focus has been on keeping people at work. “We don’t want to lose anyone; we have some 20-year employees.” So far, he said, he’s avoided layoffs.

Wicklund went on to express concern about the exploration and production industry, noting that a recent study from Deloitte finds the sector will see $300 billion of write offs this year. “That’s greater than the value of ExxonMobil,” he said. “That’s stunning in its magnitude.”

That will result in consolidation because of expected bankruptcies among the sector, and that will impact the service sector, he said.

Wicklund said he expects that oil field activity will not return to the same levels seen, say 18 months ago, when the rig count was more than 1,000. That’s due in part because the industry is capital-intensive and is no longer able to access capital.

“Over the last 10 years, to grow production as dramatically as we did, shale players still lost $2 billion. That tells me we can’t continue that level of production or production growth. The people that were losing money during that period of time will lose access to capital,” he said.

As a result, he said the E&P sector will switch from equity-owned to creditor-owned and consolidate to fewer and larger companies. In the field, that means a service company providing pressure pumping services may not find it beneficial to own a lot of pressure pumping assets, or a compressor company a lot of compressors, he said.

Consolidation in the E&P sector will be easier than in the service sector, because many service companies have too much leverage, too much debt coming due too soon, or poor credit ratings. “You don’t have enough healthy people in the room to carry out a constructive marriage,” he said.

What he advises is two or three companies getting together.

“Get Bob, Fred and Johnny to put their three rental companies together, close two locations and compete as best you can. This is when we see medium-size companies that compete start to form. Not Halliburton, second-level companies. National Oilwell Varco was formed out of seven companies. It’s more incumbent on those companies to do so, and easier – there’s no board of directors or public shareholders to deal with, no debt because no one was willing to loan to you. Everyone has to swallow their ego – ‘My company is worth more’ – so are Bob and Johnny’s. Get rid of the ego – ‘Mine is the better company, I have better people, better customers.’ None of that is any good. They’ll stay small, lack scale, and they’re going to lose, especially in the Permian Basin with companies like Concho making acquisitions, Pioneer getting bigger. From Exxon and Chevron to the larger E&Ps and more, if you’re not big enough to support them, meet their ESG and safety requirements, you won’t work for those people.”

Whiteley agreed that consolidation is in the cards for the service sector, observing that there already have been a number of mergers.

“Everyone is working together to get through this,” he said.

While it’s hard to know what the next five years will bring, Whiteley said he expects the industry to emerge leaner and more efficient. In the meantime, his company is taking advantage of the lull to develop new product lines.

“We’ll keep going,” he said. “We’re fortunate we’re in a position that we don’t need to join hands.”

Wicklund said he also sees bankruptcies weeding out the weaker players.

“Over the last three or four years, bankruptcy changed from the past. When you went bankrupt, you closed everything down, sold your assets, the ideas that didn’t work went away. In bankruptcy today, ownership change is the only difference. The people in the field, the senior management, the assets, nothing changed. You don’t weed out the weak players, take out the strained assets. This time appears to be more of a chance for more of that.”

He said the industry is in survival mode and cutting costs and expenditures as much as possible.

“I think 2021 will be better. I think oil prices will be higher,” he said. “I still don’t see oil getting to $50 or $60 or $70 any time soon. It’s good that demand has picked up; the worst of the COVID pandemic is behind us. No one is flying yet, gasoline demand has bottomed out and going back up. The patient is not going to do any more. That was the fear for a few weeks. The patient isn’t well yet, but there’s a big sea change in attitude and sentiment.”