Muscat – Oilfield services companies in the GCC countries will benefit this year from increased upstream sector activity and rising investments by oil producers in the region, the global credit rating agency Moody’s said.

The supply-demand imbalance in the oil and gas market and the increase in oil prices since mid-2021 have prompted international oil companies (IOCs) as well as national oil companies (NOCs) to increase their investments to close this supply gap, Moody’s said in a report released on Monday.

‘These factors have helped increase demand for oilfield services. We expect the oilfield services industry to benefit from rising investments by global oil producers in 2023, especially in the GCC region,’ the rating agency said.

According to Moody’s, the GCC-based NOCs are increasing their capital spending upstream for two main reasons. Firstly, GCC oil and gas producers will likely play a bigger role in providing much-needed supply to Europe over the longer term as European countries seek ways to reduce their energy dependence on Russia.

Secondly, in a carbon transition scenario, as demand reduces over the course of the next decades there is a risk that some of the assets of these NOCs could become stranded and lose value over time. Against this backdrop, all major NOCs in the GCC region have committed to increase their production targets over the course of the next four to five years.

In addition, the sharp rise in oil prices since mid-2021 has boosted oil companies’ cash flows, leading to a significant improvement in their credit strength.

‘Although we expect oil prices to be lower in 2023 than in 2022 which will result in a weaker financial performance by these companies, we still expect them to maintain strong credit metrics and have sufficient financial flexibility to fund their upcoming capital spending plans,’ Moody’s noted.

Jackup rig demand in GCC is rising

The stable operating performance of the NOCs in the GCC region and the increase in their capital spending will continue to support demand for new rigs as well as long-term rig renewals, Moody’s said.

According to RigLogix, the number of contracted rigs in the GCC region has risen to 131 in 2022 from 115 in 2021 and is expected to increase to 134 in 2023.

‘We expect demand for oilfield services to remain robust during 2023 as IOCs and NOCs increase their capital spending in a continued effort to ramp up their production capacity. This is especially the case for many of the GCC-based NOCs which are driving an expansion in offshore drilling activity and increasing demand for jackup rigs,’ Moody’s said.

All GCC-based NOCs have raised their production since the second quarter of 2021 in response to growing demand for oil as many governments globally started to relax some of the COVID-related restrictions they had imposed at the start of the pandemic.

Pricing power is improving

Moody’s expects oilfield services companies’ revenue and earnings to grow in 2023 as they solidify recent gains in pricing power amid ongoing strong demand.

The rating agency said, ‘Oilfield services earnings typically lag the performance of the exploration and production sector, but we expect oilfield services companies’ growth to outperform other oil and gas sectors this year because of high contracting activity.’

‘Prospects for the oilfield services sector in the region look strong for the next 12 to 18 months. Although Brent crude prices have dropped in 2023 to an average of US$82 per barrel down from above US$100 per barrel in 2022, we expect that at these prices oilfield services activity will remain healthy,’ Moody’s added.

Last year’s rising demand pushed up utilisation rates for oilfield equipment and services and Moody’s expect this trend to continue in 2023.

‘Oilfield services providers’ pricing power will continue to improve and lead to margin growth this year despite labour and materials cost inflation. We expect the industry to stay disciplined about adding capacity and continue to push pricing,’ Moody’s said.

A tight supply of oilfield services equipment in 2022 also enabled providers to achieve higher average day rates compared to 2021.

‘We expect day rates to continue to rise this year as customers renew contracts; however, the average day rate for jackup rigs does not fully capture this trend because some of the existing contracts were signed at very low day rates,’ Moody’s said.