October 24, 2019

Earnings Roundup: US Oil & Gas Equipment Services

by Tajinder Dhillon.

With oil majors beginning to report earnings next week, we look at how the Equipment Services sub-industry fared during 19Q3.  While Halliburton and Schlumberger both beat earnings expectations this quarter, both suffered a decline in YoY earnings growth of 32.0% and -6.5% respectively. Revenue growth also declined 10.1% for Halliburton while Schlumberger experienced flat growth at 0.4%.

Equipment Services play a critical role in providing value-added services and equipment to exploration and production (E&P) companies that search for oil and gas. Activities include pressure pumping (assisting with hydraulic fracturing of geological formations), wireline logging (transmits data from a borehole), and drilling (customized fluids used for drilling).

Commentary from companies such as Halliburton and Schlumberger can be a leading indicator to the health and outlook of E&P companies.  If fewer services are being provided to E&P companies, it is likely that there is a decline in activity and drilling by oil majors including Exxon and Chevron.

A weakening US market

Both companies mentioned the strength of international markets while seeing a decline in U.S. activity. “The financial results this quarter were driven by the strength of activity in the key international markets. Summer activity peaked in Russia, the CIS and the North Sea. The Far East and Asia regions also saw strong growth, and new project began in Sub-Sahara and North Africa. Only Latin America revenue was lower on reduced activity in Mexico and Argentina. In North America, we experienced strong offshore sales, offset by minimal growth on land” (Olivier Le Peuch, CEO, Schlumberger).

Halliburton CEO Jeffery Miller echoed similar sentiment, “as the second half of 2019 unfolds, U.S. and international markets continue to diverge. International activity growth is gaining momentum across multiple regions. Meanwhile, operators’ capital discipline weighs on North American activity levels. The U.S. land rig count declined 11% from the second to the third quarter for the first time in 10 years … pricing pressures continued as operators tried to lower overall costs in order to meet their cash flow objectives … looking ahead to the fourth quarter, we see more of the same. We expect customer activity to decline across all basins in North America land.”

Halliburton has greater exposure to North American markets compared to Schlumberger according to Eikon by Refinitiv.  Approximately 56% of Halliburton’s revenues are generated from North America, while 44% is international.  Schlumberger on the other hand has 34% of its revenue coming from North America.

Given the greater revenue exposure Halliburton has to North America, it appears that analysts view this more bearishly when looking at analyst estimates according to I/B/E/S data from Refinitiv.  Consensus estimates for revenue, EBITDA, and EPS have come down materially post-reporting for both companies as seen in Exhibit 1.

Exhibit 1: % Change in Consensus Estimates

Decline in capital expenditures from US operators

Picking up on the point of capital discipline, Exhibit 2 displays aggregate capital expenditure growth for the S&P 500 Oil & Gas Exploration & Production sub-industry.  Capex growth has turned negative in 19Q2 and expected to stay negative over the next four quarters.

Exhibit 2: S&P 500 Oil & Gas Exploration & Production Capex growth

Decline in US oil production

Oil production has also declined in the U.S., including key areas such as the Permian Basin, responsible for approximately 37% of all U.S. crude oil production.  The Permian Basin is a key area for shale oil, which has seen a cooling in growth since August 2018 as seen in Exhibit 3.

Exhibit 3: US Oil production YoY growth in Permian Basin

Worrying economic outlook

Not surprisingly, oil markets are facing uncertain times from both from a supply/demand and geopolitical perspective.

“Supply and demand uncertainties continued to impact commodity prices. On the one hand, Iran sanctions, Venezuela production declines and political instability in Latin America and North Africa are constraining supply. On the other hand, there’s near-term uncertainty in demand due to ongoing U.S.-China trade tensions and negative economic data out of Asia and Europe. As the U.S. production growth continues to weigh on supply, OPEC+ extended its agreement until March 2020 to manage production and support oil prices” as stated by Jeffery Miller.

Oilver Le Peuch shared similar worries, “the market environment remains challenged with limited visibility, particularly in view of the global trade concerns that are challenging world economic growth and the rate of oil demand growth. At the same time, the U.S. production growth rate has declined for the last 8 months, and it is expected to drop further in 2020 as a result of the reduced activity this year.”

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