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A Pre-Earnings Analysis of the Oilfield Services Sector
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As is the norm, oil services companies – providers of technical products and services to drillers of oil and gas wells – will kick off the first-quarter 2020 earnings season for U.S. energy firms. Considering the current weakness in the energy market environment amid the plunge in crude prices so far this year, the health of the oilfield service sector has taken a big hit.
The slump in oil prices has pushed drilling activity lower by introducing tremendous uncertainty around the exploration and production (‘E&P’) spending outlook. As supplier of technology, solution and parts to the E&P sector, the sentiment toward the oil services firms is rather pessimistic ahead of their reports. Consequently, most sector components – including well-established big names like Schlumberger (SLB - Free Report) , Halliburton (HAL - Free Report) and Baker Hughes (BKR - Free Report) – are likely to report weak earnings.
Let's take a look at the key items likely to have impacted oilfield services companies' revenues and earnings.
Oil Prices Tank: Strong commodity prices typically lead to robust upstream activities. As exploration, drilling, and production picks up, oil service providers see a surge in their sales and profitability. With the West Texas Intermediate (or WTI) crude oil prices crashing in the March quarter, clients have been forced to make substantial capital spending cuts.
For the three-month period ending Mar 31, WTI prices fell 66.5% - the largest quarterly percentage decline on record – as coronavirus induced a massive slump in oil demand amid a supply glut. With major cities under lockdown and travel restrictions in place, the consumption for crude has dropped substantially. In fact, the commodity ended the quarter at just over $20 a barrel, which is certainly not enough to trigger investments in mature field development, exploring unconventional resources, or expanding offshore programs. This slowdown in activity hurt overall demand for services and equipment across the industry spectrum and does not bode well for the upcoming earnings season.
North America E&P Activity Slumps: The North American market remains a key driver of revenues for oil service firms. As such, the rig count in the United States is another yardstick in determining exploration spending by producers and therefore, the health of oilfield service providers. Usually, the more operating rigs there are, the more oil service companies make in revenues.
During the first quarter of 2020, U.S. rig count decreased by 77 (from 805 to 728) in conjunction with the oil price crash. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest faltering North American drilling and completion activity in the January-March timeframe. Oil service firms with sizable presence in the region are expected to have suffered heavily on this sentiment.
International Situation Slightly Better: While international E&Ps are also pulling back on spending due to continued weak oil prices, the degree of decline is likely to be less than North America. This is because most of these projects are backed by national oil companies and/or integrated majors that consider a long-term horizon. Moreover, a sizeable proportion of international projects are offshore that have been okayed over the past few years and are difficult to stop or cancel suddenly.
Pricing Woes: The severe slowdown in North American drilling has led to pricing pressure for oil servicing firms, impacting their top-line growth. While no operator is immune to lower product pricing, the situation is worse for smaller companies that are debt-heavy or cash flow negative and are unable to provide concessions to E&P clients.
Our Take
In a nutshell, the oilfield service fundamentals remain extremely bearish with most of the companies entirely focused on survival. From Core Laboratories (CLB - Free Report) to ProPetro Holding (PUMP - Free Report) to Oceaneering International (OII - Free Report) , the company boards have adopted various strategies to survive the downturn. They have been lowering capital spending, furloughing employees and cutting executive pays. Even biggies like Halliburton and Schlumberger – both carrying a Zacks Rank #3 (Hold) - have announced a set of belt-tightening measures.
The oil service companies will be in the limelight later this week as first-quarter earnings reports for the group start rolling in. Investors may want to take a cautious approach to the industry ahead of earnings. At the same time, analysts feel that the full impact of the coronavirus pandemic and the oil price slump will only be felt in the upcoming quarters.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
A Pre-Earnings Analysis of the Oilfield Services Sector
As is the norm, oil services companies – providers of technical products and services to drillers of oil and gas wells – will kick off the first-quarter 2020 earnings season for U.S. energy firms. Considering the current weakness in the energy market environment amid the plunge in crude prices so far this year, the health of the oilfield service sector has taken a big hit.
The slump in oil prices has pushed drilling activity lower by introducing tremendous uncertainty around the exploration and production (‘E&P’) spending outlook. As supplier of technology, solution and parts to the E&P sector, the sentiment toward the oil services firms is rather pessimistic ahead of their reports. Consequently, most sector components – including well-established big names like Schlumberger (SLB - Free Report) , Halliburton (HAL - Free Report) and Baker Hughes (BKR - Free Report) – are likely to report weak earnings.
Let's take a look at the key items likely to have impacted oilfield services companies' revenues and earnings.
Oil Prices Tank: Strong commodity prices typically lead to robust upstream activities. As exploration, drilling, and production picks up, oil service providers see a surge in their sales and profitability. With the West Texas Intermediate (or WTI) crude oil prices crashing in the March quarter, clients have been forced to make substantial capital spending cuts.
For the three-month period ending Mar 31, WTI prices fell 66.5% - the largest quarterly percentage decline on record – as coronavirus induced a massive slump in oil demand amid a supply glut. With major cities under lockdown and travel restrictions in place, the consumption for crude has dropped substantially. In fact, the commodity ended the quarter at just over $20 a barrel, which is certainly not enough to trigger investments in mature field development, exploring unconventional resources, or expanding offshore programs. This slowdown in activity hurt overall demand for services and equipment across the industry spectrum and does not bode well for the upcoming earnings season.
North America E&P Activity Slumps: The North American market remains a key driver of revenues for oil service firms. As such, the rig count in the United States is another yardstick in determining exploration spending by producers and therefore, the health of oilfield service providers. Usually, the more operating rigs there are, the more oil service companies make in revenues.
During the first quarter of 2020, U.S. rig count decreased by 77 (from 805 to 728) in conjunction with the oil price crash. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest faltering North American drilling and completion activity in the January-March timeframe. Oil service firms with sizable presence in the region are expected to have suffered heavily on this sentiment.
International Situation Slightly Better: While international E&Ps are also pulling back on spending due to continued weak oil prices, the degree of decline is likely to be less than North America. This is because most of these projects are backed by national oil companies and/or integrated majors that consider a long-term horizon. Moreover, a sizeable proportion of international projects are offshore that have been okayed over the past few years and are difficult to stop or cancel suddenly.
Pricing Woes: The severe slowdown in North American drilling has led to pricing pressure for oil servicing firms, impacting their top-line growth. While no operator is immune to lower product pricing, the situation is worse for smaller companies that are debt-heavy or cash flow negative and are unable to provide concessions to E&P clients.
Our Take
In a nutshell, the oilfield service fundamentals remain extremely bearish with most of the companies entirely focused on survival. From Core Laboratories (CLB - Free Report) to ProPetro Holding (PUMP - Free Report) to Oceaneering International (OII - Free Report) , the company boards have adopted various strategies to survive the downturn. They have been lowering capital spending, furloughing employees and cutting executive pays. Even biggies like Halliburton and Schlumberger – both carrying a Zacks Rank #3 (Hold) - have announced a set of belt-tightening measures.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The oil service companies will be in the limelight later this week as first-quarter earnings reports for the group start rolling in. Investors may want to take a cautious approach to the industry ahead of earnings. At the same time, analysts feel that the full impact of the coronavirus pandemic and the oil price slump will only be felt in the upcoming quarters.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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