Why Oilfield Services Stocks Are Underperforming Despite A Strengthening Oil Market
The oil market has seen an upswing this year, with the global rig count rising by 9% year-over-year as of mid-September, and Brent crude prices up by close to 20% year-to-date, driven by the OPEC-led production cuts and some geopolitical uncertainties. However, major oilfield services companies, including Schlumberger (NYSE:SLB) and Halliburton, have seen their stock prices underperform, falling by about 13% and 20% year-to-date, respectively. In this note, we take a look at some of the factors that likely contributed to this underperformance.
Our interactive dashboard on what lies ahead for Halliburton in 2018 details our expectations for the company through the rest of the year. You can modify any of our forecasts or key drivers to see the impact that changes would have on the company’s results.
Global E&P Spends Are Growing At A Slower Than Expected Pace
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While the profitability of oil and gas companies has improved over the last few quarters, companies have been more focused on generating higher financial returns and operating within their available cash flows, rather than going for meaningful production growth. Upstream players also resorted to a lot of belt-tightening through the downturn, cutting their spends on oilfield services, and they are looking to leverage these efficiencies to boost margins as prices pick up. For instance, Schlumberger noted during its Q1 conference call that there hasn’t been an upward revision to 2018 global exploration and production spending in line with the oil price increase. While activity in the North American market has picked up year-over-year, things have remained more mixed in international markets, particularly in regions such as Latin America. The revenues of oilfield services companies are also well below their 2014 highs. For instance, Halliburton and Schlumberger are expected to see these revenues decline by 25% to 30% in 2018, compared to 2014.
Permian Basin Headwinds
Activity in the Permian, a crucial oil and gas basin in the U.S., has been mixed for some time now, due to a lack of pipeline capacity for the transportation of crude. This has effectively created a glut of oil, pushing local prices close to four-year lows, causing operators to slow down their drilling and production activity, hurting demand for oilfield services. Additionally, a tight labor market in the U.S. and inflation concerns are also hurting activity in the region. The Permian is the most important oil and gas basin for services companies, as CapEx in the region is expected to represent close to a third of total spending on major U.S. land plays within the next three years.
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