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Why Oil-Field Service Stocks Got Crushed in May

Matthew DiLallo, The Motley Fool

What happened

Shares of oil-field service companies tumbled in May, according to data provided by S&P Global Market Intelligence. The stock prices of Core Laboratories (NYSE: CLB), National Oilwell Varco (NYSE: NOV), Schlumberger (NYSE: SLB), and Halliburton (NYSE: HAL) each fell between 16% and 23% last month, weighed down by slumping oil prices and credit concerns.

So what

May was a rough month for the oil market. The global benchmark price, Brent, slumped 11% and closed at $64.49 per barrel, while the U.S. oil price benchmark, WTI, tumbled 16%, finishing the month at $53.50. The main issue weighing on oil prices was escalating trade war tensions between the U.S. and China, which is starting to negatively affect global economic growth. The concern is that this slowdown will affect oil demand.

Oil field worker with a laptop at sunset.

Image source: Getty Images.

While oil-field service companies don't produce any oil, its price has a direct impact on their operations. That's because oil producers tend to reduce their activity levels when oil prices fall, which reduces demand for services and equipment.

The sector has struggled over the past year due to increased oil price volatility. Crude crashed toward the end of 2018, which led most oil companies to reduce their spending plans for 2019, which had a notable impact on profitability in the service and equipment sector during the first quarter. That was evident in the results of leading equipment maker National Oilwell Varco, for example, which reported that its revenue declined and its loss deepened. While the company saw some bright spots starting to develop after crude prices bounced back during the first quarter, the recent sell-off in oil prices could reverse some of those positives. Core Labs, likewise, posted first-quarter results below those of the prior-year period. Worse yet, it unveiled a tepid outlook for the second quarter because of the continued impact of the crash on crude prices at the end of 2018.

In addition to the pressure of falling oil prices last month, S&P Global lowered its credit outlook for oil service industry giants Schlumberger and Halliburton. The credit rating agency cut Schlumberger's credit rating by one notch to A+ while reducing Halliburton's outlook from stable to negative. An analyst wrote that the service industry has "fundamentally changed due to permanent efficiency and productivity gains realized by E&P companies as well as investor sentiment calling for E&P companies to live within cash flow and limit production growth." As a result, "Oilfield services companies will no longer be able to generate the high operating margins they did in 2014." These rating moves could make it more expensive for oil-field service companies to borrow money. 

Now what

The oil-field service and equipment market can't seem to catch a break. Instead of increasing spending when oil prices rebounded earlier this year, oil producers sent that cash back to shareholders. Now, with crude having crashed in May, the sector might pull back spending even more, which would put even more downward pressure on service and equipment prices. That will likely push the sector's long-awaited recovery even further into the future.

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Matthew DiLallo owns shares of Core Laboratories and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. The Motley Fool recommends Core Laboratories. The Motley Fool has a disclosure policy.