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Investors, analysts upbeat on oilfield services majors despite challenging Q3

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Essential Energy Insights - September 17, 2020

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Investors, analysts upbeat on oilfield services majors despite challenging Q3

Investors could be warming up to the long-suffering oilfield services sector, analysts said, as the stock prices for sector bellwethers Schlumberger Ltd. and Halliburton Co. jumped following quarterly earnings reports despite significant challenges for North American land markets.

Shares of Schlumberger on the New York Stock Exchange have rallied almost 10% since the world's biggest public oilfield services company reported its third-quarter results Oct. 18, even as the company took a $12.7 billion impairment charge related to its North American business. The write-down led to an $11.4 billion third-quarter loss.

Similarly, Halliburton stock has climbed more than 8% since it reported earnings Oct. 21, although the Houston-based services major said a slowdown in shale drilling sent North America revenue 11% lower quarter over quarter.

The moves present clear evidence that "it won't take much (good news) for [oilfield services] stocks to go up (not down) on quarterly prints/calls this earnings season, which is a rare, but welcome sight for long-suffering investors," analysts with Tudor Pickering Holt & Co. said Oct. 22.

However, the analysts warned that investors "staying too late at the party" could be setting up for "tricks" amid the "copious amount of bad news which is already reflected in oilfield services stocks."

Halliburton CEO Jeffrey Miller said during the company's quarterly earnings call that customer feedback implies a year-over-year drop in fourth-quarter rig counts and completion activity. Customers' free cash flow generation commitments and oversupply of the gas market, along with concerns about oil demand softness in 2020, will combine with the typical holidays and potential weather impacts to soften activity in the fourth quarter, the CEO said.

Similarly, Schlumberger's new CEO, Olivier Le Peuch, said the company expects a higher risk of decline in North American land activity in the fourth quarter compared with the 2018 period. The winter holiday season will combine with budget exhaustion as customers operating within cash flow cease operations earlier than they did in 2018, Le Peuch said.

The difficulties in the North American market are a negative for the services industry and the stocks within it, the Tudor Pickering Holt analysts said. Oilfield services companies are going to have to be proactive about managing their operating cost structures to help "lessen [the] severity of profitability erosion" over the coming quarters, the analysts said.

Taking control amid the uncertainty, Schlumberger and Halliburton will continue to employ new strategies that steered them through the North America land market challenges in the third quarter.

Schlumberger is using a scale-to-fit approach to the market, Le Peuch said Oct. 18. Upon reviewing its market position, strength, technology and customer opportunities, the company will decide whether to reduce its portfolio to fit one or multiple basins. It will also consider changes to its business model to focus on technology access, setting up technology as opposed to operating it.

"The new CEO's strategy is in the early stages of unwinding past missteps and returning the company to its higher-return technology roots," BMO Capital analyst Daniel Boyd said Oct. 22.

Boyd said he expects that the process will take years to materialize, and 2020 will be a transition year fraught with risks of dilutive divestitures and operating free cash flow that does not cover the dividend.

Halliburton will also deploy technology to lower its cost and accrue value for the company, the company's CEO said Oct. 21. The company plans to integrate its wireline and fracturing services and will develop new technologies to enable integration to minimize nonproductive time, improve efficiency, and reduce personnel, location and capital costs.

Halliburton will also stack equipment rather than "work for insufficient margins and wear out our equipment," Miller said.

The U.S. frack market is in "near free fall," and the fourth quarter is expected to be down 28% compared with the second quarter, Boyd said. However, "management's new downcycle strategy to prioritize margins over share coupled with fixed cost reductions ... are mitigating the earnings impact and may drive downcycle margins higher," he said.

Le Peuch said that while the U.S. oil production growth rate has declined for the last eight months and will decline further in 2020, "the prospect for international activity growth remains firmly in place."

Tudor Pickering Holt said quarter-to-quarter results for the international markets were "naturally lumpy," but the trend for oilfield activity growth and eventual pricing recovery remains constructive heading into 2020.