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Being proactive in pandemic may have softened blow for oil services firms in Q2

Oilfield services companies best positioned for future success are those that utilized the market activity downturn in the first half to reevaluate and resize their operations, analysts said.

Challenges are innate for oilfield services companies tasked with providing solutions for the ever-changing needs of their customers. Still, as customer activity slowed sharply through the second quarter, a more significant challenge emerged for the sector how to survive the substantial market downturn.

International activity levels declined 20% in the second quarter, and the U.S. markets saw a dramatic 50% decline – "the most dramatic sequential changes in activity levels" since at least the 1980s, Credit Suisse analyst Jacob Lundberg said July 14. Companies that initiated cost-savings programs should see second-quarter earnings results that are better than most expectations, Lundberg said.

"By and large we were impressed with our companies' initial response to the crisis," Bernstein analyst Nicholas Green said July 13. Companies promptly communicated issues, they quickly began cost-cutting and cash preservation measures, and they acknowledged the level of the threat they and the industry face, Green said.

"[Oilfield services] companies have stacked assets — that is, put them on temporary standby or into long-term 'cold storage' — and reduced headcount in response to the market downturn, which will lead to meaningful cost savings," Fitch Ratings said in a July 15 email. "However, we expect revenues and cash flows of the most affected companies to remain substantially below the 2019 levels for the next few years."

Across the sector, revenues and EBITDA in the second quarter are forecast to be down about 30% and 50%, respectively, Lundberg said. Companies focused on completions are likely to show the most significant revenue decline at about 70% with EBITDA falling into the negative.

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Raymond James analyst Praveen Narra agreed, "While OFS companies responded with cutting costs earlier and faster as well, many of the companies we cover will be EBITDA negative for 2Q20," he said July 13.

Schlumberger Ltd. CEO Olivier Le Peuch projected during the company's first-quarter earnings call in April that the second quarter could be the industry's "most uncertain and disruptive" ever. Facing the downturn head on, the company instituted a structural cost-out program it has already upsized to $1.5 billion, Lundberg said.

Following Schlumberger, Houston-based services and equipment provider National Oilwell Varco Inc. could shift its $625 million cost-out targets higher, Lundberg said. Halliburton Co., first to report second-quarter earnings on July 20, needs to address the structural components of its $1 billion program, he said.

Green sees Schlumberger's second-quarter results outperforming Houston-based oilfield services major Halliburton "on the basis they will continue to give clear and reassuring information on their response to the crisis." Baker Hughes Co., which rebranded as an energy technology company, is expected "to keep articulating their equity case," he said.

The Bernstein analyst expects all sector companies to firm-up and reiterate their cost savings measures during their respective earnings calls. He expects the companies will discuss the stability of pricing and customer support; address debt maturities, covenant compliance, and deleveraging head on; and be prepared to discuss detailed cash flow forecasts.

"Investors want to be reassured on all these points, to get behind the idea of a safe investment case," Green said.

Meanwhile, amid the crude oil price recovery from a record low settlement at $37.63 per barrel on April 20 to a current price of around $40/bbl, outlooks for sector companies have improved.

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Bernstein analysts in April suspected a good entry point was late in the second quarter or after second-quarter earnings, "once initial panic had calmed."

"Our sector upgrade in April highlighted unrealistically low expectations. We are more excited about [oilfield services] in a $40[bbl] than a $60[bbl] world, due to the structural change we believe is occurring," Green said.

"Now the 'panic phase' is over, we believe it is time to start stock-picking," Green said.