Shares of major oilfield services companies fell by double digits in August, according to data provided by S&P Global Market Intelligence. These included industry bigwigs Schlumberger (NYSE: SLB) (down 18.9%), Baker Hughes, a GE Company (NYSE: BHGE) (down 14.6%), and Halliburton (NYSE: HAL) (down 18.1%).
Smaller companies operating in the space were also affected. National Oilwell Varco (NYSE: NOV), with its $7.9 billion market cap, saw its shares retreat 14.2%, while shares of Helmerich and Payne (NYSE: HP), which has a market cap of $4.1 billion, fell a jaw-dropping 24.3%.
The industry as a whole, as measured by the SPDR S&P Oil and Gas Equipment & Services ETF, was down 22.2% for the month. But that drop couldn't be explained away by oil prices alone, which were only down about 8.5% in August.
The top players in the oilfield services industry saw their stocks underperform in August. Image source: Getty Images.
Oilfield services stocks fell across the board, regardless of their recent financial performance. All of the companies listed released quarterly earnings in late July. Here's a summary of how they fared:
|Company||Reporting Date||Q2* 2019 Revenue||Q2* 2018 Revenue||% Change (YOY)||Q2* 2019 Net Income||Q2* 2018 Net Income||% Change (YOY)|
|Schlumberger||July 19||$8.3 billion||$8.3 billion||0%||$492 million||$430 million||14%|
|Baker Hughes||July 31||$6.0 billion||$5.5 billion||8%||($9 million)||($19 million)||N/A|
|Halliburton||July 22||$5.9 billion||$5.7 billion||3.5%||$77 million||$152 million||(49.3%)|
|National Oilwell Varco||July 29||$2.1 billion||$2.1 billion||0%||($5.4 billion)||$25 million||N/A|
|Helmerich and Payne||July 24||$687.9 million||$648.9 million||6%||($154.7 million)||($8 million)||N/A|
*All reporting periods ended June 30. For Helmerich and Payne, this was Q3 of the company's fiscal year as opposed to Q2. YOY = year over year. Data source: company press releases. Chart by author.
In all cases, revenue was flat or up from the year-ago quarter. But that didn't make much of a difference for net income, which ranged from a modest increase (Schlumberger) to a significant increase that nevertheless left revenue in negative territory (Baker Hughes), to steep declines (Halliburton, National Oilwell Varco, Helmerich and Payne).
In some cases, the companies' adjusted figures were better. Baker Hughes, for example, posted an adjusted profit, while National Oilwell Varco's astonishing $5 billion loss was almost entirely due to a writedown in the carrying costs of long-term assets. On the other hand, Schlumberger's adjusted figures showed a 17% decline in net income as opposed to a 14% increase.
Yet whether a company's financials improved or worsened, all were hit hard during the month of August. This was almost certainly partly due to the decline in oil prices, but it also reflects some long-term trends that are hurting the overall oilfield services industry.
Specifically, during the oil price downturn of 2014-2017, oil and gas producers -- both the big oil majors and smaller independent exploration and production companies -- engaged in ferocious cost-cutting to try to make drilling profitable at the new, much lower prices. Meanwhile, oil extraction has gotten a lot more efficient, with techniques like horizontal drilling allowing companies to produce "more with less." Finally, a big pipeline bottleneck in the red-hot Permian Basin means that producers are already extracting more oil and gas from the region than they can ship, which means a lot of them aren't planning on drilling new wells until those supply constraints are eased.
All of this is weighing heavily on the oilfield services industry, and all of these problems are exacerbated when oil prices drop, as they did in August.
There's good news and bad news coming down the pipeline (sorry -- couldn't resist!) for oilfield services companies. The good news is that a number of pipelines and export terminals are under construction to take oil and gas out of the Permian Basin and ship it to new markets. Some of these are expected to come online next year, which should ease some of the bottleneck problems. As overseas markets for U.S. petroleum start to grow, it could encourage producers to drill more wells, increasing demand for the oilfield services companies.
The bad news -- at least, from an oilfield services company's perspective -- is that the cost cuts made during the price downturn and the efficiency improvements seem to be here to stay, putting pressure on margins. So even though these companies' share prices are way down -- all five have fallen between 63% and 74% over the last five years -- there may not be much relief in sight. There are better buys for those wishing to invest in the energy sector.
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This article was originally published on Fool.com