Improved shale activity should boost Q4'20 earnings for US oilfield services

Exploration and production companies returned to work at U.S. oilfields late in 2020, likely driving fourth-quarter earnings growth for oilfield services and equipment companies more exposed to U.S. shale basins. Further out, the possibility of a global market recovery later in 2021 points to earnings growth opportunities for a wider number of oilfield services sector companies, analysts said.

"Fourth-quarter [earnings] results for the oilfield service majors will likely be in-line to above consensus; however, there will be a mixed bag of better-than-expected results in North America as the U.S. rig count continued to rise into year-end and the international markets remained soft," Evercore ISI analyst James West said in a Jan. 12 email.

The U.S. onshore rig count grew 20% quarter over quarter in the fourth quarter of 2020, Credit Suisse analyst Jacob Lundberg said Jan. 13. Baker Hughes Co. data showed the U.S. land rig count peaked at 776 rigs in January 2020, tumbled to 231 in August 2020 and ended the year at 334 rigs.

Lundberg said the rig data compares with guidance from land drillers reporting about 25% of combined rigs as active. A Credit Suisse survey found about 20% growth in completions, which the analyst said is in line with guidance from pumpers.

U.S. completions activity was up about 40% sequentially in the fourth quarter, Tudor Pickering Holt & Co. analysts said Jan. 15. As a result, "We believe completion services players might put up some big beats and lift 2021 earnings expectations … despite the dreary pricing dynamics that pervade this segment of the market."

In May 2020, Bank of America upgraded a few U.S.-focused oilfield services providers with a call to own sector stocks more heavily geared toward U.S. completions. "We're sticking with that call through at least [fourth-quarter] earnings season," analyst Chase Mulvehill said in a Jan. 6 note.

Fourth-quarter 2020 earnings for Halliburton Co. and Baker Hughes, which will kick off earnings season on Jan. 19 and Jan. 21, respectively, are expected to surprise to the upside.

An increase in fracking activity also bodes well for Liberty Oilfield Services Inc., which recently closed on a deal with Schlumberger Ltd. to acquire OneStim, Schlumberger's onshore hydraulic fracturing business in the U.S and Canada, Tudor Pickering Holt said.

Across the group of oilfield services companies in its purview, Credit Suisse expects modest sequential revenue growth of about 2% as the outperformance in the U.S. onshore market is partially offset by weaker-than-expected international activity levels, Lundberg said.

The Credit Suisse analyst said the international rig count fell 10% quarter over quarter in the fourth quarter, which aligns with company guidance for slightly reduced international activity.

"We see international levered names at more risk of shortfalls driven by weaker activity levels and mix shift as lower-margin [North America] outperformed," Lundberg said. The analyst noted that only twice in the last ten years has oilfield services giant and industry bellwether Schlumberger lost its historical trade premium of about 2% over competitor Halliburton — once in 2016 and now.

Schlumberger has notably underperformed its closest peers Baker Hughes and Halliburton by more than 2,500 percentage points over the last 12 months, Tudor Pickering Holt & Co. analysts said Jan. 13. However, "we firmly believe that clear deficit in (relative) exuberance for this name will flip and that [Schlumberger] will close (or erase) the gap in 2021."

Mid-to-high single-digit exploration and production spending growth driven by the international markets and dramatically reduced cost structures are expected to support a "decidedly better" 2021 for internationally focused Schlumberger, according to Evercore ISI.

Bank of America's Mulvehill said international-levered stocks, including Schlumberger, Core Laboratories NV, and National Oilwell Varco Inc., which recently changed its name to NOV Inc., will gain favorability once U.S. land activity reaches maintenance levels. "The debate today is if this is a [first half] or [second half] rotation. With how we think the [international] recovery plays out — i.e., more of '22 inflection than 2H21," Mulvehill said.

Tudor Pickering Holt anticipates an overall activity boost during the first half, likely in the second quarter, and expects some shorter-cycle activity in Latin America, Southeast Asia, and possibly the Middle East.

North America activity "will continue to grind higher [in the first half], but international activity's rise rests just on the horizon, and [Schlumberger] is swimmingly positioned to benefit from it," Tudor Pickering Holt said.