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Oil Service Q4 Earnings Preview: What Investors Need to Know

Nilanjan Choudhury

As is the norm, oil services companies – providers of technical products and services to drillers of oil and gas wells – will kick off the fourth-quarter earnings season for U.S. energy firms. Considering the current weakness in the energy market environment amid the drop in crude prices in late 2018, the health of the oilfield service sector has taken a big hit. Consequently, most sector components – including well-established big names like Schlumberger SLB and Halliburton HAL – are likely to report disappointing results.

First, let's take a look at the main factors impacting oilfield services companies' revenues and earnings.

Oil and Gas Prices: Strong commodity prices typically lead to robust upstream activities. As exploration, drilling, and production picks up, oil service providers see a surge in their sales and profitability.

With the West Texas Intermediate (or WTI) crude oil prices crashing in the past quarter, clients are taking a more conservative approach on their investment decisions. Oil prices around the $50 a barrel mark is certainly not enough to trigger investments in mature field development, exploring unconventional resources, or expanding offshore programs. This slowdown in activity hurts overall demand for services and equipment across the industry spectrum and does not bode well for the upcoming earnings season.

E&P Spending: The rig count in the United States is another yardstick in determining exploration spending by producers and therefore, the health of oilfield service providers. Usually, the more operating rigs there are, the more oil service companies make in revenues.

Interestingly, during the fourth quarter of 2018, the U.S. rig count increased by 29 (from 1,054 to 1,083) despite the oil price crash. While there is a typical delay of around three-four months between oil price changes and its reflection on rig counts, the statistics suggest steady North American activity in the October-December timeframe. Oil service firms with sizable presence in the region are expected to gain favorably on this sentiment.

Apart from the above-mentioned indicators, there is another factor in assessing the earnings prospects for oilfield service companies: the Permian drilling pullback.

Permian Slowdown: Make no mistake, the Permian Basin still remains the most sought-after unconventional basin and continues to post the biggest production gains in the United States. However, pipeline bottlenecks out of the region, which is expected to last well into 2019, has taken a toll on drilling and production service demand.

By now, it is well documented that serious logistical constraints in West Texas’s Permian ‘super basin’ is forcing operators in the region – especially those without committed pipeline capacity – to sell their produce at discounts. This caused operators to slow down their drilling and production activity, impacting demand for oilfield services.

In fact, there is a backlog of nearly 3,800 drilled but uncompleted wells in the Permian Basin - indicating a slowdown in well completion activity.

It’s Not All Doom and Gloom

With oil plunging to a 17-month low of $42.53 a barrel on Christmas Eve and down nearly 40% over the fourth quarter, oilfield service investors should brace for a tough quarter of results with more misses than hits.

However, there are still a couple of companies likely to beat our fourth quarter earnings estimates. Investing in such companies can fetch handsome returns for investors. This is because a stock generally surges upon earnings beat.

But with a wide range of energy firms thronging the investment space, it is by no means an easy task for investors to arrive at stocks that have the potential to deliver better-than-expected earnings.

While it is impossible to be sure about such outperformers, our proprietary methodology – Earnings ESP – makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

You could further narrow down the list of choices by looking at stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

2 Stocks to Focus On

CSI Compressco LP CCLP: A provider of compression services and equipment for natural gas and oil production, The Woodlands, TX-headquartered partnership is focused on the key shale plays in the United States.

The service provider has been on a dismal run: it missed estimates in each of the last four quarters.

However, with an Earnings ESP of +4.17% and a Zacks Rank #3, an earnings beat is possible for CSI Compressco in the upcoming quarterly release.

The company is expected to report fourth-quarter 2018 results on Feb 26.

ProPetro Holding Corp. PUMP: Founded in 2005, ProPetro Holding is an oilfield services company that primarily offers hydraulic fracturing to major oil and gas operators.

Coming to the earnings surprise history, this Midland, TX-headquartered specialized service provider has been on a slippery slope: it went past estimates just once in the past four quarters.

But our model indicates that ProPetro is likely to beat on earnings this time around, as it has a Zacks Rank of 3 and an Earnings ESP of +7.19%.

The company is expected to report fourth-quarter 2018 results on Mar 25.

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