Oilfield Service Stocks Expected To Post Blowout Earnings

For much of the ongoing oil rally that's now lasted almost two years, oilfield services companies have lagged. That has been the case because the bulk of each new dollar earned from drilling has gone to producers. Thankfully, the balance appears to be now shifting, with E&P economics favoring oilfield services companies. You can tell that from the performance of the sector, both on a shareholder returns basis and financials.

The sector's popular benchmark, the VanEck Vectors Oil Services ETF (NYSEARCA:OIH), is up 57.2% in the year-to-date, eclipsing the Energy Select Sector SPDR Fund's (NYSEARCA:XLE) 41.7% gain.

The first OFS company to return this year's earnings scorecard has not disappointed, either: Halliburton Company (NYSE:HAL) has exceeded Q1 earnings estimate, with revenue of $4.28B (+24.1% Y/Y) beating by $80M while non-GAAP EPS of $0.35 beat by $0.01.

"We see significant tightness across the entire oil and gas value chain in North America. Supportive commodity prices and strengthening customer demand against an almost sold-out equipment market are expected to drive expansion in Completion and Production division margins."

The company expects strong international business to increase throughout the remainder of the year and expects to deliver profitable growth, strong free cash flow and industry-leading returns. Related: OPEC+ Missed Its March Output Quota By 1.45 Million Bpd

Other big names in the industry set to report earnings later in the week include Schlumberger Ltd (NYSE:SLB) and Baker Hughes (NASDAQ:BKR), while Patterson-UTI Energy (NASDAQ:PTEN), Nextier Oilfield Solutions (NYSE:NEX), Liberty Oilfield Services (NYSE:LBRT) and Helmerich & Payne (NYSE:HP) are scheduled to report over the next two weeks.

Pricing Power

With energy prices rebounding, many producers are looking to expand, and they're having to pay up to find the right crews and equipment. Citi analyst Scott Gruber has told Barrons that "pricing power for oilfield 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."

The OFS shift has been most evident in the employment market, with OFS firms hiring once again.

OFS companies have reported that drilling and well completions activity as well as pricing have been edging higher, while roughnecks are also saying they are seeing an increase in job offers. Oilfield workers were some of the hardest-hit demographic by the Covid-19 pandemic in 2020. Nationally, the oil and gas industry is estimated to have lost 107,000 jobs as per global consulting firm Deloitte, with an estimated 200,000 roughnecks losing their jobs at the height of the global lockdowns.

According to trade group Energy Workforce & Technology Council (Council), U.S. oilfield jobs have been increasing over the past year.

Prices are expected to follow suit soon. Pricing power is returning in niches like high-spec onshore drilling rigs, with day rates for such U.S. rigs already having seen a $1,000 per day increase with more to come. 

Halliburton, Schlumberger, and Baker Hughes have become the first OFS victims of the Ukraine crisis due to their sheer size and brand recognition. However, Rystad Energy's head of energy services research Audun Martinsen has told the Financial Times that their smaller peers could continue operating under the radar because they are not directly exploiting or exporting oil and natural resources.

Goldman Sachs recently screened for companies with pricing power ahead of Q1 results, and flagged Haliburton, Baker, and Schlumberger as well-positioned.

"Pricing power will become increasingly important in the face of continued inflation and cost pressures. In order to assess the sustainability of margins, we will monitor the ability of firms to pass increased costs through to consumers," David Kostin, chief U.S. equity strategist, and team, said in a note.

Morgan Stanley notes that earnings revisions in the year-to-date have favored U.S. onshore companies, with Helmerich, NexTier, Patterson, and Tenaris S.A. (NYSE:TS) all seeing double-digit revisions higher so far in 2022. Schlumberger and NOV Inc. (NYSE:NOV) have seen estimates cut, in part on Russia exposure. However, Morgan Stanley feels these dynamics are well understood and favors:

• Schlumberger, given the company's exposure to a recovery in international spend
• Tenaris, as capacity restarts in North America, paired with leading-edge pricing data point to higher earnings
• Liberty should show progress on newbuild frac fleets.

By Alex Kimani for Oilprice.com

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