FTSE 350: Oilfield services still a gamble despite boom

The recent monthly average is 400-500 permits. The March figure alone is merely an indication of future activity, given not all permits will be drilled, but clearly shows the industry is happy to spend again. North Sea activity could soon follow suit, as the UK government wants to expand both offshore renewables activity and oil and gas exploration. 

This medium- and long-term implications for renewed exploration programmes will be more oil and gas supply and lower prices. This could come at the same time as demand drops for fossil fuels because of the energy transition, raising the prospect of another steep drop-off in prices in a repeat of 2020.

But for now, the beneficiaries should be the oil and gas services companies. Hunting (HTG) noted the greater demand for its shale-related products in last month’s 2021 results. Chief executive Jim Johnson said “budget constraints” that had been there for exploration and production companies had disappeared. “I am extremely optimistic that we are in the early stages of a boom,” he said on the company's earnings call. Consensus estimates see Hunting returning to a profit this year after sizeable losses in the past two years. A first-quarter trading update cemented this optimism: Hunting said its order book was ahead of pre-pandemic levels, and the US onshore-focused Titan division reported sales 45 per cent ahead of a year ago. 

London’s other main oilfield services players, Petrofac (PFC) and Wood Group (WG), have forecast similar upticks. They have the added boost of also competing for renewables contracts. Wood Group chief executive Robin Watson said in April that clients were returning at pace in both the Middle East and the North Sea, with the former seeing lots of demand for “maximising production volumes in conventional upstream assets”. 

Petrofac and Wood Group both have exposure to renewables projects as well, balancing out some of the risk that this current rush will be over once prices come down or Opec can increase production. Handily, these companies are also the ones that Opec members will turn to when and if those taps do go on.