The world oilfield services (OFS) industry continues to be in the throes of a severe downturn caused by depressed energy prices, Moody's Investor Service said on Monday.
"The global oilfield services and drilling (OFS) industry continues to endure a severe downturn as depressed energy prices prolong reduced spending by exploration and production (E&P) companies," the American credit ratings agency said in its latest report titled 'Depressed Energy Prices Continue Major Shake-up in OFS Industry'.
"As credit conditions deteriorate further, defaults are set to increase," it added.
According to Moody's, the combination of volatile energy prices and suppressed E&P spending will drive oilfield services and drilling industry EBITDA, defined as a firm's net operating income, lower by 30 to 40 percent in 2016, and stall any chance of recovery till late 2017.
Even if oil prices rebound modestly in 2016, OFS recovery will lag, given the industry's overcapacity and the gradual increase in drilling activity, the report said.
"The oilfield services and drilling industry is facing the worst downturn since the early 1980s after an unprecedented drop in global oil and North American natural gas prices," Sajjad Alam, analyst at Moody's, said in the statement.
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"Drilling activity has plummeted in most oil-producing regions, curbing demand for oilfield support services," he said.
In April, global land drilling hit a 17-year low, following a decline every month since November 2014, except for a three-month respite in mid-2015.
Moreover, as per Baker Hughes rig data, US rig activity has decreased to its lowest level in 40 years.
"We expect the US rig count to set a cyclical bottom in 2016 and then inch up in 2017 as oil markets narrow the supply/demand gap," Alam said.
According to Moody's, oilfield services and drilling companies face tighter liquidity conditions in 2016-17 amid declining cash flows, depressed asset values and limited market access.
"The rating agency's outlook for the global oilfield services and drilling industry continues to be negative," Moody's said.
"Moody's expects a number of OFS companies rated B3 or lower will not survive the protracted downturn without restructuring their debt," it added.
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