The oilfield services industry is once again facing a cyclical downturn, shaped by falling oil prices, reduced upstream spending, and mounting cost pressures. Companies like SLB SLB, Halliburton HAL and Baker Hughes BKR have all flagged a more challenging 2025, even as a few resilient areas offer some support.

Here are five key factors shaping the outlook:

Falling Oil Prices Are Tightening Budgets: WTI’s slide below $60 has triggered significant revisions to exploration and production (E&P) budgets. Independent producers like Diamondback Energy have already cut their 2025 capital budget by $400 million, while Coterra Energy plans to reduce its Permian rig count by 30% in the second half. With many shale drillers citing $65 as the breakeven point, every dollar below that takes a toll on profitability and service demand. With producer budgets under real pressure for the first time in years, drilling activity is beginning to slow, impacting oilfield service contractors across the board.

Tariff Pressures Are Fueling Cost Inflation: Trade tensions have re-emerged as a major concern. SLB warned that nearly half of its operations are exposed to tariffs, especially those involving materials shipped between the United States and China. Baker Hughes said tariffs could impact 2025 EBITDA by as much as $200 million. Halliburton projected a 2-3 cent EPS hit in Q2 alone. As equipment costs climb, margin pressure builds. the Zacks Rank #3 (Hold) firm even raised concerns about producers pushing back on higher-priced equipment, especially in U.S. land markets.

You can see the complete list of today’s Zacks #1 Rank stocks here.

North America Slows, While International Recovery Wobbles: North American oilfield activity has slowed significantly, with the downturn expected to stretch into the second quarter. As a proof of this, Halliburton’s revenue in the region fell 12% year-over-year to $2.2 billion in the first quarter, and lower stimulation activity and completion tool sales led to a sharp margin decline in its Completion & Production division. Analysts now forecast rig count declines in the high-single digits and double-digit reductions in dayrates, which could compress margins by a fourth next year. The international landscape isn’t faring much better. SLB reported a 5% drop in Q1 international revenues, with Latin America down 10%. Slow starts in key regions like Mexico, Saudi Arabia, and offshore Africa are weighing on recovery momentum. Reflecting this broad softness, BKR sees global spending to fall mid-to-high single-digit in 2025.

LNG and AI Data Center Demand Offer Bright Spots: Even amid the slowdown, some verticals are flashing green. LNG infrastructure and data center demand continue to attract investment. Baker Hughes expects to book at least $1.5 billion in data center-related orders over three years. These projects, less sensitive to near-term oil price volatility, are helping companies cushion the blow. Power grid upgrades and natural gas infrastructure — especially in regions like UAE, Brazil, and Asia Pacific — are likely to keep certain service pockets active.

Margin Compression May Delay Investor Interest: Despite historically low valuations, investor enthusiasm remains muted. Some drilling contractors are projected to deliver modest free cash flow yields over 2025-2026. Adding to the hesitation is the unclear timeline for the next upcycle. With margins under pressure and efficiency gains already baked in, many investors are holding back, waiting for clearer signs of stabilization before stepping back in.

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Final Word

The oilfield services sector seems to be caught in a downturn, with soft commodity prices, weaker producer budgets, and tariff-related inflation driving slower activity across both North American and international markets. While LNG and AI-related infrastructure offer isolated growth, the broader picture remains mixed. Companies are bracing for flat or declining revenues, cost deflation, and uncertain pricing power, suggesting that investors may need to be patient through another bumpy stretch in the cycle. Moreover, the Zacks Oil and Gas Field Services industry currently ranks in the bottom 32% out of 245 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next few months.

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This article originally published on Zacks Investment Research (zacks.com).

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