Oilfield services majors beat Q4'20 expectations, look for growth in 2021

Despite challenges brought on by COVID-19 and a weak crude oil market, oilfield services majors successfully navigated the fourth quarter of 2020, reporting earnings that topped market expectations. Optimistic about future oil and gas exploration activity, the companies outlined plans to support production efforts while meeting clean energy goals.

"Oil prices are back to pre-pandemic levels, driven by global vaccine distribution and unfolding demand recovery, OPEC+ discipline, and a declining production base," Halliburton Co. President and CEO Jeffrey Miller said on a Jan. 19 earnings call that kicked off the 2020 fourth-quarter earnings season. "However, some caution is appropriate due to the surge in COVID-19 infections globally and the expected gradual return of spare production capacity."

Halliburton took advantage of the downturn, using the time to consolidate to fit the shrinking market. As the market recovered, Halliburton's fourth-quarter earnings reflected the structural changes.

Halliburton "reset its North American business with a reimagined product and service delivery system, a leaner platform with reduced costs, and lower capital intensity," Evercore ISI analyst James West said in a Jan. 19 note.

Industry giant Schlumberger Ltd. beat consensus earnings estimates for the quarter by 29%. "Schlumberger ripped the cover off the ball with these results," analysts with Tudor Pickering Holt & Co. said Jan. 25.

Analysts noted that U.S. land market activity, driven by completions of drilled but uncompleted wells, supported the earnings surprises. "Both companies did far better than we had estimated [in U.S. hydraulic fracturing] — and our estimates were for strong growth," Spears and Associates analysts said Jan. 25.

North America is shaping up for continued growth in 2021, albeit with exploration and production companies expected to take "a more disciplined approach to spending and production growth this cycle," West said.

Additionally, against expectations for global market weakness, global revenues grew in the 2020 fourth quarter as markets including the Middle East and Asia proved resilient, Tudor Pickering Holt said.

International revenues should be up by double digits year over year in the second half of 2021 for Halliburton and Schlumberger, BMO Capital Markets analyst Phillip Jungwirth said Jan. 25. Along with its short-cycle business, Schlumberger's international market outlook, broadened to include offshore, should drive higher revenue growth in the second quarter, the analyst said.

"[Schlumberger's] results and outlook color certainly should have engendered warm fuzzies for anyone paying attention," Tudor Pickering Holt said. While Schlumberger remains an underperformer compared to its competitors, Halliburton and Baker Hughes Co., "we wholeheartedly believe that delta is set to close in 2021 as [Schlumberger] flexes its technology portfolio, leaner cost base, and free-cash-flow muscles."

Technology, including the acceleration of digitalization, emerged in the oilfield due to the pandemic and the 2020 OPEC+ oil price war and is "revolutionizing the competitive landscape," West said. "[Halliburton's fourth-quarter 2020] earnings clearly conveyed that the company is employing digitalization and enjoying the fruits of that asset-lite labor."

Sustainability and lower-carbon solutions will become a larger part of the industry as the sector's history of developing tools and technologies that solve complex engineering challenges makes it "uniquely capable to tackle carbon reduction," West said in a Jan. 24 note.

On recent earnings calls, the oilfield services majors each outlined plans that were as much about carbon capture, clean energy and a digital transformation as capturing oil market share.

Halliburton is performing the first electric grid-powered fracking operation for Cimarex Energy Co. in the Permian Basin. Cimarex Energy achieved pump rates that were as much as 40% higher than conventional pumps, Northland Capital Markets analyst Doug Becker said in a Jan. 20 note.

Schlumberger is also contributing to a clean energy future, focused through its New Energy segment on carbon capture and storage. Baker Hughes is taking a more substantial bite out of the energy transition pie as it continues to pivot to an energy technology company.

"Baker has successfully pivoted over the past two years by touting its long history in LNG, hydrogen and [carbon capture, utilization and storage], executing on a corporate rebranding as an energy transition enabler, and executed a number of bolt-ons to expand its carbon appeal," West said.

Baker Hughes' cost out program, solid uptake in its digital strategy, a shift to high return products and services businesses, new verticals — mainly industrial — and its goals to support the energy transition drove fourth-quarter 2020 earnings beats, analysts said.