Analyst Q&A: EnergyPoint Research

Analyst Q&A: EnergyPoint Research

EnergyPoint Research provides independent research regarding customers’ satisfaction with the oil and gas industry and its products and services. The firm’s surveys focus on various oil and gas industry segments, including offshore drilling, land drilling, oilfield products, oilfield services, midstream services and downstream.

EnergyPoint and its data has been cited by many leading business and industry resources including: Wall Street Journal, New York Times, Barrons, Fortune, The Sunday Times, Harts E&P, Oil & Gas Journal, and Oil and Gas Investor.

Managing Director Doug Sheridan talks us through some of the latest trends in the oil and gas market, including the growing importance of digital oilfield technology, the adoption of water-based fluids and more.

Q1. What have been the most important technological advancements in offshore drilling over the last decade? How have the advances in digital oilfield technologies (directional drilling, remote monitoring, etc) affected production rates?

Advancements in the offshore drilling sector over the last ten years have, to a large extent, been influenced by operators’ focus on deep-water and ultra deep-water opportunities. For a number of reasons, advanced drillships have become the preferred rig-type for these wells. Drillships offer self-propulsion, increased mobility, greater deckload and deck space, more rapid and lower-cost mobilizations, and increasingly stable and safe operating environments. They are also highly computerized. Many offshore contractors have also upgraded older-generation semi-submersibles to incorporate some of the same features found within drillships, including self-propulsion, dynamic positioning and automation. The result is an impressive fleet of highly sophisticated and capable rigs now available to customers at the high end of the performance spectrum.

Although adoption has been slower than many proponents had hoped, digital oilfield technology is beginning to play an increasingly important role in enhancing the productivity of today’s oil and gas fields. The improvements in quality and timeliness of information collected both at the surface and downhole, coupled with a growing capacity to analyze and draw conclusions from such data, have improved the industry’s decision-making abilities.

In the past, everything from the selection of downhole drilling tools to the creation of maintenance programs were often based on insights and conclusions that were months or even years old. With today’s improved data collection and analysis, decisions are more timely, informed and collaborative in nature. The net result is enhanced productivity and efficiency, with the ability to drill and produce more complex wells on an increasingly routine basis.


Q2. What factors influence customer satisfaction for oilfield suppliers, and how does this impact on the industry’s capabilities? Which categories garner the highest praise from oilfield customers?

First of all, it’s important to note that in most segments of the oil and gas industry, the price of a product or service is less a driver of customer satisfaction than many presume. For example, although offshore drilling rates can approach $500,000 or more per day for an advanced rig or drillship, EnergyPoint’s data suggests customers are more heavily influenced by the level of performance and reliability, job quality, and service and professionalism displayed by a contractor than by the rates charged. The same is true for many other oilfield service segments. When it comes to equipment and materials, suppliers and products that rate consistently high for engineering and design, as well as for performance and reliability, tend to garner the highest ratings from customers.  

Historically, oil country tubular goods (OCTG) has been one of the highest rated categories across our surveys. In particular, casing and production tubing earn high marks among customers. Oilfield fluids, chemicals and proppants are also highly rated, driven by strong scores for both drilling and completion fluids. Conversely, because of the unwelcome, but understandable, wear and tear that can result from its heavy use, rig-related equipment has traditionally been among the lowest-rated product categories. Subsea equipment also tends to receive lower ratings, due in part to the industry’s stubborn unwillingness to embrace standardization.


Q3. What factors are affecting the demand for drilling fluid? Are environmental concerns steering companies away from using oil-based fluids?

Currently, the demand for drilling fluid is being negatively impacted by the overall low rate of drilling. However, we and many other industry observers believe drilling activity for this particularly long and arduous downturn has bottomed out. Since demand is basically a function of the number of wells drilled, sales of drilling fluid can be expected to grow along with rig count in the latter half of this year and into next year.

In terms of environmental concerns affecting the drilling and completion fluids segments, the entire industry has an interest in seeing greater use of more ecologically friendly solutions. As a result, many fluids suppliers continue to roll out water-based products. In additional to their environmental benefits, these products also offer the prospects of lower operating costs. In general, the trend is to continue to find new ways to limit the potential contaminants introduced into the environment by the industry. Water-based fluids are an important part of this effort.

Q4. In your opinion, what are the biggest challenges facing the oil and gas sector in 2016? How will these changes influence the industry and how will market players respond? How have midstream suppliers reacted to the fall in oil and gas prices?

In the first half of 2016, the challenge for many industry participants, especially those with limited access to capital, has been simply survival. This is particularly the case for smaller players in the U.S. and Canadian markets. As a result, the period has been characterized by drastic cost cutting, including steep headcount reductions. While suppliers account for most of the reductions, E&P companies have also been forced to let experienced people go. It’s been tough, but the industry has done what it needed to do on this end.

Looking forward, many industry participants are embracing the cautiously optimistic view that demand for oilfield products and services will begin growing in the second half of 2016 as crude production declines lead to higher oil prices. In the U.S., there are additional signs that rising natural gas prices might spur activity as demand from natural gas-fired generation plants increases as we move into the hottest part of the year.

As activity rises, the challenge will be to get suppliers’ idled equipment back into operating condition, as well as the necessary personnel hired, trained and in place. Assuming a more gradual recovery, this should be a relatively smooth process for most experienced companies. Should demand ramp up more quickly than anticipated, however, history suggests supplier bottlenecks will be an issue.

Midstream suppliers have been impacted by lower oil and gas prices in much the same manner as their upstream counterparts. Although the midstream is typically seen as more volume- and fee-based in nature, over the years investors have grown accustomed to growth in cash flows and distributions from the segment. Unfortunately, growth is now more challenging. In response, companies have reduced operating expenses where they can. In some cases, distributions to investors have also been cut, even as some companies seek to raise additional capital. Although the segment will eventually benefit from increased development activities as commodity prices rise, recovery will likely lag that of the upstream.

 

Q5. What other industry do you find the most interesting outside of the ones you cover? Have you ever considered covering this industry?

Fortunately, the oil and gas industry is so large and diverse that I don’t really feel the need to stray outside its bounds too much. One oil and gas industry segment that has always interested me as a consumer, however, is the retail gasoline segment. After looking closely at the space, we recently decided that it made sense to include gas retailers as one of the sectors EnergyPoint covers in our annual surveys. In fact, we just recently completed our inaugural survey in the space and expect to announce results later this month. They should prove quite interesting.

Conclusion

As Doug points out, the recent decline in crude oil prices has really affected the growth of the offshore drilling market. Market vendors were forced to switch their focus to developing improved technologies to increase productivity and, more importantly, reduce the cost and risks associated with oil and gas exploration. In yesterday’s blog, we looked at 3 innovative oil extraction technologies that ensure optimum well productivity. They are experiencing heavy adoption by oil producing countries around the world.

But there is cautious optimism that demand may rise in the second half of 2016. Directional and deep-water drilling are experiencing some growth, while future trends such as sustainability and eco-friendly drilling fluids are expected to create greater opportunities. One thing is for certain, we will be keeping a close on eye on the market, so check back on the blog over the coming months for coverage of all the latest developments.

We’d like to take this opportunity to thank Doug for answering our questions and providing us with such revealing insights.

 

About the Analyst:

Doug Sheridan is Managing Director and founder of EnergyPoint Research. Prior to starting the firm in 2003, Sheridan held commercial and corporate positions in the U.S. midstream natural gas segment. He has been active in a number of industry associations, including the National Petroleum Council, and is regularly sourced for his analysis and opinions concerning the oil and gas industry, particularly in the area of customer satisfaction. Sheridan holds a B.A. from Vanderbilt University and an M.B.A. from the University of Michigan’s Ross School of Business. He lives in and is a native of Houston, Texas.

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