April 28, 2020

Earnings Roundup: US Oil & Gas Equipment Services

by Tajinder Dhillon.

The Oil & Gas Equipment & Services sub-industry kicked off 20Q1 earnings season for the S&P 500 Energy sector.

Unsurprisingly, 2020 earnings and revenue growth for the entire energy sector will be dismal given the dual shock of a collapse in demand and resulting oversupply.  According to I/B/E/S data from Refinitiv, year-over-year earnings growth for the energy sector for 20Q1-20Q4 are expected to be -68.0%, -148.7%, -119.9%, and -101.6% in each quarter, respectively.

Similarly, year-over-year revenue growth for the energy sector for 20Q1-20Q4 is forecasted at -14.6%, -38.7%, -28.3%, and -20.4% in each quarter, respectively.

Exhibit 1: 20Q1 Results for S&P 500 Oil & Gas Equipment Services

Exhibit 1 highlights 20Q1 results for the sub-industry. Halliburton reported earnings of $0.31 per share, higher than the consensus of $0.24, resulting in a positive earnings surprise of 27.3%.  This marks the seventh quarter in a row that Halliburton has posted a positive earnings surprise and it is the only company in the sub-industry to accomplish this feat.

It is also worth mentioning that in 20Q1, the price of WTI hovered above $40 a barrel for the first two months of the quarter, which will soften the true impact on quarterly results.  As a result, it will be more meaningful to look at 20Q2 and beyond to get a more complete picture of how the industry is adapting to this new environment.  For now, we look to commentary on industry activity and on how companies are managing costs and improving balance sheet resiliency.

Exploration and drilling activity in decline

Halliburton highlights the bleak outlook for the industry, stating that “activity is in free fall in North America and is slowing down internationally … at a minimum, we expect the decline in activity to continue through year-end. The market in North America is experiencing the most dramatic and rapid activity decline in recent history. Right now, North American E&P CapEx is trending towards a 50% reduction year-on-year in 2020. Since mid-March, U.S. land rig count has fallen 34% and is expected to continue declining from here” (Source: 20Q1 earnings call).

Schlumberger provided further insight on rig counts: “We anticipate both rig activity and frac completion activity to continue to decline sharply during the second quarter, to reach a sequential decline of 40% to 60%” (Source: 20Q1 earnings call). Exhibit 2 shows that the current rig count in the U.S. is 378 compared to 682 at the beginning of March.

Baker Hughes forecasts the impact to oil demand globally, commenting “this economic shock is estimated to negatively impact global oil demand by 20 million to 30 million barrels per day in the second quarter and by 9 million to 10 million barrels per day for 2020 as a whole.” (Source: 20Q1 earnings call).

Exhibit 2: U.S. Rig Count

Changes to capex, dividends, and headcount

A reduction in exploration activity significantly affects the equipment services industry, which supplies drillers with value-add services and equipment. As a result, managers are looking internally to better manage and control costs.

Halliburton, Schlumberger and Baker Hughes all announced a reduction in capital expenditure in 2020. Halliburton will cut capex by approximately 50% compared to last year, while Schlumberger and Baker Hughes will reduce capex by 30% and 20% respectively.

All three companies are cutting their workforces, with Schlumberger explicitly mentioning a cut of 1,500 people in North America during 20Q1.

Most notably, Schlumberger announced a 75% cut to their dividend. Exhibit 3 displays analysts’ FY2020 dividends per share forecast using I/B/E/S data from Refinitiv. The forcast has declined from $2.00 per share to a current estimate of $0.76. We also observe that the orange line, which represents the StarMine SmartEstimate, was quicker to forecast potential dividend problems for Schlumberger as it declined more rapidly on March 19 vs. consensus.

Exhibit 3: FY2020 Dividends Per Share Forecast for Schlumberger (SLB)

Source: Refinitiv Eikon

Upcoming debt obligations

With much discussion around bankruptcy in the energy sector, we look at upcoming debt obligations of equipment service companies. As a proportion of total debt outstanding, Schlumberger has the largest debt load with 22.7% of debt maturing this year and next.  Halliburton only has 6.93% of its total debt outstanding over the same time period, while Baker Hughes does not have any debt maturing until 2022. Individual debt maturity profiles for these companies are shown in Exhibit 4.

To access this page in Refinitiv Eikon, click on ‘Debt Structure’ when viewing a company.

Exhibit 4: Debt Maturity Profile

Baker Hughes

Halliburton

Schlumberger


Source: Refinitiv Eikon

StarMine Smart Ratios Credit Risk

Looking ahead, to monitor the balance sheet resiliency of a company in more detail, users could turn to the StarMine Smart Ratios Model. The Smart Ratios model systematically examines measures of a company’s profitability, leverage, coverage, liquidity and the growth and stability of revenue, earnings and ROE. The model calculates the probability of default (PD%) over the next 12 months and maps that to a Model Implied Rating and to a 1-100 percentile rank, where low scores represent a higher PD%

To view this page in Refinitiv Eikon, click on ‘Smart Ratios Credit Risk’ when looking at a company. It will highlight the challenging outlook for equipment service companies – for example, lower interest coverage ratios and lower free cash flow/debt over the next 12 months, while return on tangible capital and net profit margins also decline.

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