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Oilfield service firms to benefit from diversification as Permian activity slows

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Oilfield service firms to benefit from diversification as Permian activity slows

While pipeline bottlenecks in the Permian basin have dragged down U.S. land drilling activity, analysts remain positive on oilfield service companies ahead of the third-quarter earnings season as a recovery in the international onshore market should help offset the stagnating U.S. land market.

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A slowdown in the pace of well completions may weigh down third-quarter earnings expectations for oilfield service companies as a whole, but these expectations are already well established and built into the market, analysts with Jefferies said in an Oct. 3 industry note. Even if consensus earnings forecasts continue to drift lower into the earnings season, misses should be somewhat contained and only muted pricing declines are expected, the analysts said.

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Schlumberger Ltd. will report third-quarter earnings on Oct. 19, leading the pack of oilfield service majors that include Halliburton Co., Baker Hughes, National Oilwell Varco Inc. and TechnipFMC PLC.

For the second quarter, Schlumberger reported revenues of $8.3 billion, a top-line growth of 11% year on year, driven by robust North American land activity as well as a long-overdue pick-up in offshore activity, an analyst with D.M. Martins Research said in a Sept. 30 note.

Schlumberger's CEO Paal Kibsgaard said he expects a similar rate of sequential revenue growth in the third quarter with corresponding earnings growth that should again be in the range of 10% to 15%.

A slowdown in U.S. land-based activity, driven predominantly by a lack of takeaway capacity in the Permian basin, could have a negative impact on the industry's largest oilfield service provider's bottom line in the third quarter. However, analysts are hopeful that Schlumberger will have maintained momentum with about two-thirds of its total revenue exposure from international onshore markets.

Jefferies analysts said Schlumberger has unmatched reach, by geography, product and services and commercial model. "This breadth argues that [Schlumberger] more likely grows with the market as no single exposure can impact results enough," the analysts said.

For the same reason, analysts with B. Riley FBR are also positive on Schlumberger. "We like [Schlumberger] due to its hybrid revenue splits, unique strengths in the international onshore and global deepwater markets, and return-enhancement capabilities," they said in a late-August flash, giving the company a "Buy" rating.

International rig data supports the expectation for steady improvement in international onshore markets that supports Schlumberger and the larger sector. In an Oct. 1 note to clients, Raymond James analysts noted international oilfield capital spending in 2018 was up for the second year in a row.

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Aggregate spending by non U.S.-focused companies peaked in 2013 at $528 billion. After a decline of 52% in total from 2013 through 2016, the first green shoots of recovery were seen in 2017 with spending edging up 1%. Based on 2018 budgets, Raymond James' survey indicates that spending will be up 11% to $280 billion in 2018, followed by a 15% increase in 2019 and an 8% jump in 2020.

Jefferies said it looks for average international revenue growth for Schlumberger, Halliburton, Baker Hughes and Weatherford International PLC to be 4% in the third quarter compared to the second quarter.

Schlumberger has pointed to a third-quarter earnings-per-share range of 46 cents to 47 cents, reflecting only a penny or two of softness versus expectations issued at the time of the second-quarter earnings call in mid-July, Jefferies said. This compares to S&P Global Market Intelligence's earnings per share estimate for the third-quarter of 46 cents.

International exposure could also cushion Halliburton in the third quarter as company president and CEO Jeffrey Miller said, internationally, "Halliburton is better positioned than ever before to take advantage of the broad base recovery that is underway."

Compared to Schlumberger, however, Halliburton's larger exposure to the Permian basin will have a negative impact on third-quarter earnings, Miller said. Speaking at the Barclays CEO Energy-Power Conference in September, Miller said the company could take an 8 cents to 10 cents per share hit in its third-quarter results as the forewarned downturn in exploration and production activity, a decrease in customer urgency and weakness in pricing in several basins have all been worse than anticipated.

Reflecting Miller's expectations, Jefferies revised its third-quarter estimate to 49 cents per share, below the S&P Global Market Intelligence earnings per share estimate of 51 cents, which is well below the 58 cents per share reported in the second quarter.

As with Schlumberger and Halliburton, diversification is key in outlooks for Baker Hughes, given its geographic footprint, unique exposure to LNG and deepwater production infrastructure spending, analysts with B. Riley FBR said Oct. 1.

Resilience in Baker Hughes' oilfield services segment in the third quarter, along with the sale of its majority stake in its North American land pressure pumping business should help the company's third-quarter and second-half earnings, analysts with Tudor Pickering Holt & Co. said Sept. 24.

S&P Global Market Intelligence's normalized earnings per share estimate of 21 cents per share for the third quarter are well above the 10 cents per share reported for the previous quarter.

But while Baker Hughes decreased its exposure to North America land pressure pumping, helping its earnings outlooks, National Oilwell Varco remains exposed to the pullback by exploration and production companies in the prolific Permian basin.

Its predominance as an equipment and components provider exposes the company to the sluggish order intake with respect to frack and pressure pumping equipment, Jefferies said.

Although National Oilwell Varco could see some impact from a slowdown in U.S. drilling, the analysts said that only about 12% of the company's total revenues at present come from intervention and stimulation equipment and that within this 12%, only around half of the contribution is from pressure pumping equipment. About 35% of the company's revenue comes from wellbore technology, with the balance tied to coiled tubing, wireline and others, Jefferies said.

S&P Global Market Intelligence estimates 12 cents earnings per share for National Oilwell Varco in the third quarter. The company earned 6 cents per share in the second quarter.

A relative newcomer, TechnipFMC, which was formed in January 2017 by a merger of FMC Technologies and Technip, came together largely to influence deepwater development, to reduce cost and provide a model to allow sustainable change for deepwater development, the company's executive vice president and CFO Maryann Mannen said at the Barclays conference.

As such, a slow but steady improvement in the offshore markets should help the company's earnings in the third quarter and going forward. For the third quarter, S&P Global Market Intelligence expects TechnipFMC earnings per share to climb from 28 cents in the second quarter to 39 cents.