Oilfield Services Weekly Notes: Halliburton’s Ecuador Contract and Schlumberger’s Possible Divestment

Oilfield services stocks had a rough week, with the PHLX Oil Service Sector index shedding about 5.5% through Thursday on the back of lower crude oil prices. While Halliburton (NYSE:HAL) saw the largest decline, falling by about 8% through Thursday, Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) also fell by about 6% each. In this note, we take a look at some of the news that mattered for the oilfield service stocks we cover.

See Our Full Analysis For Oilfield Service Companies Halliburton| Schlumberger |Baker Hughes

Oil prices have been trending lower over the past few weeks, impacted by increasing output from U.S. shale fields, a recovery in oil production in Libya and higher supply from Saudi Arabia. There have been concerns on the demand side as well, given the tepid global economic outlook and sluggish forecasts for oil consumption growth. Brent crude prices declined to a 27-month low of under $91 this week, after the IMF cut its global GDP growth forecasts for 2015 from 4% to about 3.8%. The current pricing environment has been weighing significantly on the stocks of large oilfield services companies, given that oil and gas exploration and production activity and upstream capex spending could decline if oil and gas companies face revenue pressures. Players such as Halliburton and Schlumberger, who specialize in more high-technology service offerings such as ultra-deepwater and unconventionals, could face more pronounced near-term pressures. These projects need to be supported by attractive oil prices in order for operators to earn a fair rate of return, given that they are typically more expensive and entail higher risk.

Halliburton’s Contract Win In Ecuador

Ecuador’s state-run oil company, Petroamazonas, has signed contracts with several international oilfield services companies, including Halliburton and Schlumberger, to enhance production from the country’s mature oil fields. Halliburton has said that it would invest roughly $1 billion over five years in Ecuador towards enhancing oil recovery from existing wells and discovering new hydrocarbon reserves. The company will provide field development and project management as well as drilling and completion services to a total of nine mature fields in the country. The contracts are structured such that Petroamazonas will continue to be the operator of the blocks, while the services companies will make the investment (and bear investment risk) and receive a fixed fee for each additional barrel of oil produced. Most large oilfield services companies have been investing in their mature field services businesses of late, and Ecuador could prove to be an attractive market, given that as much as 90% of the country’s oil production comes from mature fields that were discovered between 10 and 30 years ago. ^[1]

• Trefis has a $75 price estimate for Halliburton, which translates to a market cap of around $63 billion. Our price estimate implies a 30% premium to the current market price.
• We estimate the company’s FY 2014 revenues and EPS to stand at around $32 billion and $3.98, respectively. Reuters has a consensus EPS estimate of about $4.01.

Schlumberger Mulls Sales of Oilfield Tools Rental Division

Schlumberger is reported to be exploring the sale of Thomas Tools, its oilfield tools rental division. Reuters reports that the division – which primarily rents oilfield tools, tubular, and surface equipment – could see a valuation of about $600 million, with private equity firms being among the prospective buyers. The market for rental equipment in the oilfield services industry has been becoming increasingly competitive, considering the low barriers to entry and also due to the fact that customers are becoming reluctant to sign up for long term contracts. ^[2] We believe that Schlumberger could be looking to focus on its core oilfield services business given the higher margins and the wider economic moat that the business commands.

• Trefis has a $135 price estimate for Schlumberger, which translates to a $175 billion market cap for the company. Our price estimate implies a 40% premium to the current market price.
• We project the company’s FY 2014 revenues and EPS to stand at around $49 billion and $5.59, respectively. Reuters has a consensus EPS estimate of around $5.64.

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1. Ecuador’s Petroamazonas Says Oil Output Rose 6% in 2013, WSJ, January 2014 [↩]
2. Schlumberger explores sale of oilfield tools rental unit-sources, Reuters, October 2014 [↩]