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Must-know: The oilfield services industry’s outlook in 2014

Ingrid Pan, CFA

Must-know: What's in store for oilfield service stocks this year? (Part 8 of 8)

(Continued from Part 7)

Rig counts

Baker Hughes (BHI) provides its internal estimates for worldwide rig counts every quarter. For FY2014, BHI expects that U.S. onshore rigs will average ~1,710 (flat with 2013).

U.S. offshore rigs should average ~60 (up ~5% from 2013), Canada’s rigs should average ~370 (up ~5%), and international rigs should average ~1,430 (up ~10%).

The Big Three oilfield services companies noted in their earnings reports and calls the following general themes for 2014.

The global economy is expected to continue to improve, with higher GDP helping to spur on oil demand. North America will continue to generate oil production growth, resulting in a balanced supply and demand scenario and continued support for crude prices at ~$100 per barrel. Natural gas in international markets is expected to remain stable, given demand from Asia and Europe. U.S. natural gas will likely remain weak, given continued strong supply and competition with coal. (If natural gas prices get too high, many power producers can switch to coal if it’s a more economical option—see Why natural gas will continue to gain over coal in the long term for more analysis).

Total exploration and production (upstream) capital expenditure levels are forecast to grow in the upper single digits in 2014, with North American growth somewhat lower, offset by international growth expected to be somewhat higher. The areas for growth are forecast to be Argentina, Ecuador, Venezuela, sub-Saharan Africa, Russia, Saudi Arabia, Iraq, the United Arab Emirates, and China. Upstream capex is directly related to the revenues of oilfield service companies, as the majority of upstream investment budgets go to services such as well drilling and completions or exploration operations such as seismic data gathering—the business lines of oilfield service companies. Capex growth should be driven largely by national oil companies (or NOCs).

Growth in exploration spending will be lower than the 10% growth seen in 2013, but it will still trend higher. Exploration spending should be more well-related rather than seismic (using wells to test out new plays and concepts rather than gathering data through seismic surveys).

Overall deepwater activity is forecast to continue solid growth in 2014. While some rigs remain uncontracted into the future, newer rigs with higher operating efficiency would likely be contracted. However, older rigs could see day rates negatively impacted. Offshore Gulf of Mexico activity is expected to remain solid.

Regarding the fracking market, a significant amount of overcapacity of equipment remains in the U.S., and market participants such as Schlumberger don’t expect the market to reach equilibrium in 2014. However, drilling and fracking efficiency is expected to drive growth in U.S. onshore activity. For example, consider the switch from vertical to horizontal drilling in the Permian Basin.

The companies also noted weakness in Brazil. Halliburton explained, “The entire services industry in Brazil is looking for relief to the over capitalization that has occurred there in anticipation of a much higher deepwater rig count.” Petrobras, a major upstream company in Brazil, had contracted out significant oilfield services operations. However, there has been a significant reduction in drilling activity. Companies there, such as Halliburton, are looking to negotiate the ability to remove equipment from the area and reduce costs there.

Overall, 2014 looks like it will be a year of growth for the oilfield services industry—particularly the big three, which expect to grow at a faster rate than the overall market. The companies generally noted that they should be able to generate growth by leveraging new and cutting-edge technology to achieve better pricing or margins and gain market share. All three companies expect strong free cash flow and have a track record of returning cash flow to shareholders through dividends and stock buybacks.

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