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Tight producer budgets drive oilfield services to realign spending, operations

Oilfield services companies borrowed from their customers' playbooks in the second quarter and tightened capital spending with an eye on returns. While international and offshore markets rebounded, the North America land market challenged, forcing the sector companies to make changes to their strategies as struggles continue.

Of the top three oilfield services providers by market capitalization, Halliburton Co. outperformed competitors Schlumberger Ltd. and Baker Hughes a GE company. Halliburton on July 22 reported second-quarter earnings per share of 35 cents, beating the S&P Global Market Intelligence consensus by 16.7%.

National Oilwell Varco Inc. surprised with reported earnings per share of 2 cents for the quarter 133% better than the S&P Global Market Intelligence consensus estimates for a loss of 6 cents per share. The Houston-based company said July 30 that it wrote down $5.37 billion during the quarter after reevaluating the carrying value of its long-lived assets.

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Halliburton reported modest improvement in hydraulic fracturing activity, which manifested in mid-single-digit increases in both completed stages and pumping hours during the quarter, President and CEO Jeffrey Allen Miller said.

Tighter capital spending by producers has negatively impacted drilling and completion activity in the North American land market, but Halliburton executives said the segment delivered 2% revenue growth even as the average quarterly rig count in North America dropped 13% from the first quarter. Although pricing remained stable, margins were improved by reducing costs and maximizing equipment utilization, Miller said.

The completion segment remains vulnerable to North American producer spending, Tudor Pickering Holt & Co. analysts said in a July 22 note, but they called Halliburton's ability to deliver well in areas including operational execution "comforting."

"[Halliburton] is making the best of a tough situation in [North America] by restructuring and is well-positioned to capitalize on international growth," BMO Capital Markets analyst Daniel Boyd said in a July 22 note.

Schlumberger's core international market performed admirably in the quarter as well, and remained on track for high-single-digit growth, Boyd said July 19. "International markets are poised to outgrow the U.S. for the first time since 2013," Boyd said. Schlumberger, however, struggled in North America.

Tudor Pickering Holt said it appears North America onshore pricing headwinds moved beyond Schlumberger's hydraulic fracturing services business.

Producer focus has switched to financial discipline strengthened by the consolidation of North American exploration and production companies, said Paal Kibsgaard, who stepped down Aug. 1 as Schlumberger's CEO. During a July 19 earnings call, Kibsgaard said the U.S. shale oil market, despite the challenges, remains the only near-to-medium term global production growth market.

Olivier Le Peuch, who took over as CEO after Kibsgaard retired, said continued efficiency improvements have reduced the number of active rigs and frack fleets, so far without a significant impact on oil production.

To navigate the challenges, Schlumberger remains returns-focused, Le Peuch said. The company is deploying new technology and working closely with major independents and integrated oil companies to develop unconventional shale resources, he said.

This strategy contributed to the company's second-quarter earnings of 35 cents per share, equal to the S&P Global Market Intelligence consensus.

Baker Hughes also found support from its international market performance. Second-quarter earnings of 20 cents per share beat the S&P Global Market Intelligence consensus of 19 cents per share.

The outcome for Baker Hughes "checks all the requisite boxes to keep us constructive on this story/stock," Tudor Pickering Holt analysts said.

Better-than-expected results across business segments supported earnings, the analysts said. They added that the company generated "splendid" $355 million of free cash flow during the second quarter, reversing the first-quarter outflow as promised.

While pleased with the company's international performance, Baker Hughes Chairman, President and CEO Lorenzo Simonelli also sees growth in North America. "We expect U.S. production to grow over the coming years, even as capex slows," he said on a July 31 earnings call. The increase will drive growth in product lines such as chemicals and artificial lift, he said.