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Tickers in this Article: SLB, HAL, RIG, BHI
While the oil service companies did manage to survive this year's hurricane season without incurring too many downtime related losses, they now face a perfect storm of a different sort that threatens to put a damper on their bottom line growth for quite some time to come. Despite share prices that are as much as 80% off their highs for companies like Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB), Transocean (NYSE:RIG) and Baker Hughes (NYSE:BHI) there's no obvious catalyst on the horizon to prompt any sort of meaningful share price recovery at this juncture. (For an in depth look at this industry, check out our Oil Services Industry Handbook.)

Price Slump will Crimp Drilling Activity in 2009
The dramatic slump in oil and natural prices since mid-year is now expected to prompt a significant slowdown in drilling activity around the world. Broker Barclays Capital now expects exploration and production spending to be flat worldwide in 2009, with a 29% drop in North America. It also forecast that the U.S. rig count would decline to 1,500 or less by May next year (currently they are about 2,000 rigs in the U.S.) as the major oil companies drastcailly slash their exploration budgets in the face of lower energy prices and limited availability of external funding.

Offshore Drilling No Longer A Priority
The big slump in North American spending forecast by Barclays suggests that the political debate which raged earlier this year regarding offshore drilling may now be moot. While it did prompt a executive order from President Bush lifting the ban, and the passage of a Democrat sponsored compromise bill in the Congress, with gas prices now under $2 a gallon, the urgency to push forward with this is no longer there. The incoming Obama administration has reserved the right to review all executive orders, which could lead to a restoration of the offshore drilling ban. (Find out how oil's fluctuating price affects more than just how much you pay at the pump, in our related article How Does Crude Oil Affect Gas Prices?)

The new President and Democrat dominated Congress could also raise taxes and roll-back favorable accounting rules and increase royalties on those major oil companies operating in the U.S., further limiting funds that could be directed at exploration.

Tough Times lead to Tough Negotiations
Given the grim prospects for next year, it's no surprise that Halliburton CFO characterized 2009 as being "very challenging", and things for the industry could get even more challenging as evidence is emerging that the hard-pressed oil producers are now taking a hard nosed attitude in their negotiations with the oil services companies. According to a Dow Jones Newswire piece, several major oil producers have announced delays in major projects and scaled back expansion plans in an effort to futher depress market conditions thus allowing them to secure more advantageous terms from contractors. If they succeed, then such favorable terms could be locked in for years, crimping the bottom lines of the contractors for a long time to come.

The Final Word
The longer oil prices stay down at these levels, the greater the odds that the oil service group will be forced to lock-in unfavorable contracts.

To learn more about companies in this sector, be sure to read our Oil And Gas Industry Primer.

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