Increasing oil demand is driving higher oilfield service activity

Market Realist

Why some oilfield service companies are well positioned for growth (Part 10 of 10)

(Continued from Part 9)

Positive outlook

Globally, increasing demand for energy—especially oil—is driving higher oilfield service activity. The takeaway from most of the comments of large cap, diversified oilfield services companies such as Schlumberger (SLB), Baker Hughes (BHI), Halliburton (HAL), and Weatherford (WFT) is that the outlook for the companies’ performance is positive.

Summary of major trends

  • Higher spending from upstream energy sector—Positive
    • Elevated oil prices are supporting spending from upstream energy names
    • In some cases, companies have revised their capex budgets higher
  • U.S. rig activity up slightly, earnings driven by efficiencies—Positive
    • Though companies were not overly bullish about levels of activity increasing in the United States, most see opportunities in being able to drive earnings through increasing efficiencies—especially with the trend of pad drilling
  • Higher well count and stage count helping U.S. fracking market—Positive
    • Excess capacity remains in the U.S. pressure pumping (fracking) market, but oilfield service companies reported a trend of higher frack intensity (for example, more frack stages in the Marcellus Shale), which helps to absorb some of the excess capacity
  •  U.S. Gulf of Mexico activity appears bullish—Positive
    • Oilfield service companies reported more activity in the Gulf of Mexico across the board
  • Latin America market showed weakness—Negative
    • Many oilfield service names reported weaker performance in Latin America during 2Q13, citing a “transitional” period particularly with regards to northern Mexico
  • Strong positive signals for activity in Eastern Hemisphere—Positive
    • Activity across all of Asia was strong
    • Oilfield service companies also had positive comments about Russia
    • The pursuit of unconventional gas in Saudi Arabia and Oman is one of the factors helping to boost activity
  • A move towards share buybacks supports stock prices—Positive
    • Halliburton and Schlumberger both have stock buyback programs in effect, which helps provide a bottom to share prices
    • Stock buybacks from mature companies signal strong cash flows, and that management may think shares are undervalued
  • Technological improvements could drive earnings—Positive
    • Oilfield service companies have reported technological innovations that they believe could help drive more business, better efficiencies, and higher earnings

Recommendation

The tone of 2Q13 earnings calls from the large, diversified oilfield service companies was positive, and investors can gain exposure to these names through several avenues. Firstly, investors can buy the shares of the individual names like Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), and Weatherford (WFT). Investors can also purchase shares of exchange traded funds such as the Market Vectors Oil Service ETF (OIH), the SPDR S&P Oil & Gas Equipment and Services ETF (XES), and the PowerShares Dynamic Oil & Gas Services Portfolio (PXJ). Plus, broad oil and gas ETFs such as the Energy Select Sector SPDR (XLE) have significant exposure to oilfield service names.

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