US shale oil and gas market slowdown will impact on Scottish firms

Shares in oil services heavyweight Hunting have plunged six per cent after it highlighted a sharp slowdown in US shale market activity which will alarm sector players in Scotland.

A range of Scottish firms have expanded in the US in response to tough times in the North Sea amid the crude price plunge from 2014.

They looked to capitalise on moves by oil and gas firms to shift investment to the US onshore market, in which production costs are much lower than in the deeps of the North Sea.

However, a trading update from Hunting provided fresh evidence the resulting boom in activity is petering out. Oil and gas firms are looking to maximise returns on the huge investments they have made while conserving cash.

Surging production in the US has put pressure on crude prices amid concerns about the outlook for global economic growth. Brent crude reached a four year high of $85 per barrel in October last year but sold for around $65.40 yesterday.

“Activity levels within the North American oil and gas industry continue to slow, with the pace of decline increasing particularly within the US onshore market,” said London-based Hunting, which highlighted “capital budget exhaustion” within its client base in the market.

In November Glasgow’s Weir Group noted tough trading conditions in US shale markets. The engineering giant revealed it had cut around 450 jobs in the sector and warned its oil and gas division’s profits for this year would be lower than expected.

It said cash-flow discipline and tight financing conditions for operators in North American markets had intensified leading to early budget exhaustion and an accelerated slowdown in demand.

Weir supplies pumps used in the fracking process, which involves pumping sand and chemicals into rock to release oil and gas.

It is one of a number of Scottish firms that have expanded in the US shale market in recent years through acquisitions.Others include the Aberdeen-based Wood and Centurion groups.

Petrofac, a significant employer in the North Sea, moved into the US shale market last month through the acquisition of a local player.

Firms that decided US shale offered good long term growth prospects will be hoping that any slowdown in activity proves to be short-lived.

Recent updates from Petrofac have provided indications North Sea activity levels have been picking up, in response to a partial recovery in the crude price since late 2016.

Petrofac noted yesterday that it had won $1 billion contracts recently to work on existing oil and gas facilities in markets such as the North Sea and the Middle East. Orders accelerated in the second half of the year reflecting a recovery in market conditions.

The company has been “actively growing” its engineering team in Aberdeen. It is thought to employ around 900 people in the city and 2,000 working offshore in the North Sea.

But Petrofac said yesterday that global order intake for work on new facilities has been further impacted by bidding process delays following the previously announced loss of awards in Saudi Arabia and Iraq in the first half.

In August chief executive Ayman Asfari said order intake had been impacted by the challenges the company had faced in those states, amid an investigation by the UK Serious Fraud Office.

Petrofac noted then that no charges had been brought against it or any officers or current employees. The company said it continued to engage with the SFO and would respond to any further developments as appropriate.

The SFO announced in February that David Lufkin, the former global head of sales at Petrofac, had pleaded guilty to offering corrupt payments in an attempt to secure contracts in Saudi Arabia and Iraq.

Hunting, which employs around 135 people in Aberdeen and the North Sea, said US offshore and international market demand “slowly returns to growth”.it expects to achieve full year results in the range of current market expectations, depending on the outcome for this month.Hunting shares closed down 25.2p at 384p.

Petrofac shares closed down 7%, 26.6p, at 374.4p.

Moves by major exporters such as Saudi Arabia and Russia to curb production have provided support for the oil price since late 2016.

The Brent crude price fell from $115 per barrel in June 2014 to less than $30/bbl early in 2016 after growth in supplies ran ahead of demand.

Source: The Herald