Prices and margins are improving for companies like Haliburton.
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Oil services and equipment companies slimmed down after the last oil bust, and that’s left them looking lean as oil booms again. That dynamic could be good for prices and margins in the months ahead, and analysts are increasingly excited about the stocks.
The companies are set to start reporting first quarter earnings this week, starting on Tuesday with Halliburton (HAL). Other big names in the industry include Schlumberger (SLB) and Baker Hughes (BKR), which are set to report earnings later in the week. There are also several smaller companies that report over the next two weeks, including Patterson-UTI Energy (PTEN), Helmerich & Payne (HP), Nextier Oilfield Solutions (NEX) and Liberty Oilfield Services
(LBRT).
The companies have done well this year, because they’re finally seeing demand pick up again. That sets a high bar for earnings. The PHLX Oil Service Sector index is up 60% this year.
All the major service companies cut staff and operations over the past few years, a trend that sped up during the depths of the pandemic. Oil companies weren’t willing to spend on drilling new wells when oil prices were low, and the companies no longer wanted to carry idle equipment on their balance sheets.
With prices rebounding, producers are once again looking to expand, and they’re having to pay up to find the right crews and equipment. Citi analyst Scott Gruber wrote that “pricing power for oil-field services appears not only in place but gaining momentum as E&Ps want to avoid losing an efficient crew and avoid the risk that accompanies a replacement crew.”
While most publicly traded producers are bringing back production slowly to satisfy their austerity-minded shareholders, private operators have been quickly adding rigs. The rig count in the U.S. is finally rising in a more steady pattern, a good sign for the service companies.
For much of the oil rally that’s now lasted almost two years, oil-field services companies have lagged. The bulk of each new dollar earned from drilling has gone to the producers. But Gruber thinks the balance is shifting now. “E&P economics have never been so good relative to oil-field services economics,” he wrote.
“This suggests that the economic rent within the shale value chain should increasingly flow toward oil-field services companies in the quarters ahead. As such we see upside to consensus estimates for many of the domestically levered oil-field services names and would look to take advantage of any weakness in the stocks during earnings that appears driven by near term factors.”
Because of that dynamic, Gruber thinks that Wall Street may end up being surprised by the strength of earnings from Halliburton , Patterson-UTI, Helmerich & Payne , Nextier and Liberty.
Still, other analysts see the potential for disappointment. The supply chain for oil and gas has been tricky, with prices rising for steel, sand and other key components in the process. And Covid restrictions around the world in the first quarter may cause numbers to underwhelm, warns Taylor Zurcher, an analyst at Tudor, Pickering, Holt & Co. Zurcher expects investors to pay close attention to company discussions of the second half of the year. He thinks North American service companies, which would include companies like Patterson-UTI, are set up well going into earnings.
Halliburton’s earnings should set the stage. The company is expected to earn 34 cents per share on $4.2 billion in revenue, 22% more than a year ago, according to FactSet.
Write to Avi Salzman at [email protected]
