As some of the biggest oilfield services providers prepare to report their third quarter results, analysts see tight customer spending in North America land markets remaining an earnings drag for the sector through the end of September.
U.S. onshore producers' focus on rewarding investors with better returns has kept exploration and production dollars tight, which continues to pinch oilfield services companies, analysts said.
Although the upcoming third-quarter earnings season will likely do little to encourage investor confidence, the sector's biggest company, Schlumberger Ltd., is a top pick for Morgan Stanley due to its similar focus on investor returns. The investment bank recently upgraded Schlumberger to Overweight.
Schlumberger's enhanced focus on returns under its new CEO Olivier Le Peuch could drive growth in earnings and free cash flows even without higher oil prices or service price improvements, Morgan Stanley analyst Connor Lynagh said. The oilfield services giant will also reap the benefit of the slow but tangible recovery in the offshore markets, where the company has its largest presence. The analyst noted that the dynamics had shifted and that offshore markets could deliver higher growth than North America.
"Questions remain around [the] pace of [Schlumberger's] turnaround, dividend sustainability, and longer-term earnings power," Lynagh said in a Sept. 24 note.
S&P Global Market Intelligence estimates Schlumberger's third-quarter normalized EPS was 40 cents, compared to 35 cents in the previous quarter.
Tudor Pickering Holt & Co. analysts said despite the new business vision, which "entails an element of shrink-to-grow strategy," the long-term investment thesis for the company has not changed. The analysts said Schlumberger still faces heightened competition from its primary competitors as well as from "reinvigorated" local and regional competitors. Although Le Peuch said the company's dividend would remain at $2.00 per share, "we simply aren't inclined to jump on board the Schlumberger stock bandwagon, despite the admittedly palatable about 5% dividend yield," the firm said Sept. 20.
"We think [Schlumberger] has capacity to cut operating and capital costs substantially in a downturn and protect its dividend," Lynagh said.
Much of Schlumberger's lackluster growth has been the result of its spending in and exposure to North America land markets. The company is shifting its capital expenditure focus back to its core offshore and international markets, Lynagh said.
"Investors remain most negative on the North American centric stocks," Goldman Sachs oilfield services analyst Angie Sedita said Oct. 4.
Goldman Sachs cut its earnings estimates on Halliburton Co., which it said is tied to the high-risk U.S. pressure pumping market, to below the street level, Sedita said.
Market Intelligence estimates indicate Halliburton will report third-quarter normalized earnings per share of 34 cents, off a penny from the previous quarter.
With 100 years of business under its belt, Halliburton will remain among the global leaders in the sector, Tudor Pickering Holt said Sept. 29. The company's stock is down 30% year to date at its lowest level since the global recession of 2008-09, but "No way we're walking from this stock today. No way," they said.
Morgan Stanley is cautious on Halliburton with a rating of Overweight but is constructive on Baker Hughes, a GE company.
Baker Hughes' heavy involvement in LNG projects gives the company a competitive edge. LNG project sanctioning remains strong and players like Baker Hughes will have upbeat commentary compared with competitors facing significant earnings revisions, Lynagh said Oct. 8.
The Market Intelligence consensus estimates implies Baker Hughes third-quarter normalized earnings per share of 24 cents, compared to 20 cents in the previous quarter.
Back at the helm after General Electric gave up controlling interest through a series of stock sales and repurchases, attention will turn to how Baker Hughes has differentiated its production and services portfolio from its peers, Tudor Pickering Holt analysts said. Baker Hughes is only about 40% exposed to upstream and its oilfield services segment is about 40% tied to production, the analysts said.
"To be clear, we think that most [oilfield services] stocks today are already baking in a 2020 doomsday scenario, but we say that [Baker Hughes] is the one big-cap [oilfield services] stock to own if Chicken Little proves right and the (global oilfield activity) sky really is falling," the analysts said.
Given its diversified business mix, including LNG exposure, about 70% total international exposure and no pressure pumping, Sedeta said Baker Hughes is "the most defensive in our coverage."