Margin Squeeze & Contract Changes Up & Down Oil Patch? (TOT, BP, RDS-A, E, SLB, HAL)

Several of the big oil companies are putting the squeeze on oil field services providers to renegotiate contracts and lower costs for drilling services. BP plc (NYSE:BP), Total SA (NYSE:TOT), and Royal Dutch Shell plc (NYSE:RDS-A) are reportedly asking for reductions of as much as 40% from European contractors Technip SA, CGGVeritas, and Saipem SpA, a subsidiary of Italian oil major Eni SpA (NYSE:E).

Bloomberg has reported on this issue.  The CEO of Technip, Europe’s second largest services firm, said that BP wants to reduce costs to 2004 levels. The CEO of CGGVeritas said, “Total is very vocal about it, and BP is very pushy.”

It’s hard to blame the oil guys. Oil field services costs nearly doubled from 2004 to 2008, mainly as the price of steel rose and labor costs soared due to demand for oil, which drove the price of a barrel to nearly $150. Now that oil prices have fallen to around $50/barrel and steel prices have fallen and rig counts have dropped substantially (which should lower labor costs), the oil companies are saying that the services contracts need to be renegotiated.

That means that services firms will have to go back to their suppliers to renegotiate their own contracts. One industry analyst noted that “oil companies are unlikely to achieve all the savings they seek, since the supply of services is declining while demand remains.”

Large NYSE-traded services firms Schlumberger Ltd. (NYSE:SLB) and Halliburton Co. (NYSE:HAL) are facing the same pressures.  Halliburton is trying to remove the costs out out of its supply system.

This across-the-board cost cutting suggests that revenues, at least, will be lower for both oil companies and the services firms. That means low or no growth, and is sure to cause analysts to re-evaluate ratings on both types of firms.

Paul Ausick
April 6, 2009