Exploration-focused oilfield service (OFS) companies will face the largest demand decline as a result of oil and gas producers cutting their capex and operating expenditure, followed closely by drillers, Fitch Ratings says. The impact will be felt across the entire OFS sector, but diversified companies and service providers working in regions with low breakeven oil prices are better-placed to withstand the downturn.
The largest cut in oil and gas producers' capital programmes will be in the exploration segment, which we expect to reduce by 20%-30% in 2020 yoy. We expect this will reduce funds from operations (FFO) of PGS ASA, a global marine seismic company focusing on the offshore segment, by more than half. This has renewed pressure on the company's liquidity and led us to downgrade its rating to 'CCC' on 27 April 2020, despite a successful refinancing in February 2020.
OFS companies serving projects with high full-cycle costs, such as deep-water offshore assets or shale basins, will also be affected. North America-focused Nabors (B-/Rating Watch Negative) and Precision Drilling (B+/Negative) are exposed to the volatile spending patterns of US shale producers.
Diversified companies with exposure to the entire life-cycle of a well will be more resilient, as will service providers that cater to regions with either very low breakeven prices or less-volatile oil production. ADES International (B+/Stable) primarily serves customers in Saudi Arabia and Kuwait, while Eurasia Drilling (BB+/Stable) is focused on Russia. While both ADES International and Eurasia Drilling will be negatively affected by OPEC+ volume cuts, which encourage oil producers to downsize their drilling programmes, their financial performance should still be more resilient than that of their international peers operating in higher-cost geographies.
We assume that ADES International will lower drilling volumes and day rates to accommodate the capex cuts announced by its main customers. This is a more conservative assumption than ADES International's own guidance of no impact on its revenue or EBITDA from OPEC+ production cuts. However, the company should still be able to maintain its financial metrics within our rating sensitivities between 2021 and 2023.
We expect Eurasia Drilling's revenue and earnings to be only moderately affected by the coronavirus pandemic, lower oil prices, and Russia's commitments to OPEC+ cuts, as Russian oil producers are planning only limited cuts to drilling volumes. Lukoil's capex budget for 2020 should remain broadly stable yoy. Rosneft and Gazprom Neft expect capex reductions of around 10% and 20% yoy, respectively. We believe that Eurasia Drilling's leverage will increase in 2020, although it will remain in line with our rating guidelines.
While we expect oil and gas prices to gradually recover from April's lows, the OFS market will experience a recovery lag of four to six quarters, as producers will be cautious about increasing exploration and drilling activity and will be unlikely to reverse pricing concessions obtained from service providers. We expect utilisation rates for rigs and vessels to normalise in 2021, but day rates will follow a more gradual recovery curve.
OFS companies have stacked assets - that is, put them on temporary standby or into long-term 'cold storage' - and reduced headcount in response to the market downturn, which will lead to meaningful cost savings. However, we expect revenues and cash flows of the most affected companies to remain substantially below the 2019 levels for the next few years.
Furthermore, OFS companies with significant debt maturities up to 2022 will face refinancing challenges. We believe that the operating cash flow generation of OFS companies will be under pressure during this period, while access to capital markets is highly uncertain for at least the next few months.
