By Avi Salzman
Most oil company stocks have been soaring as escalating violence in the Middle East pushed oil prices to their highest levels in six months. But a small subset of companies hasn't participated in the rally and could face increasing scrutiny as their earnings season begins this week.
Stocks of the big oil service companies, which provide producers with equipment and services such as well construction, have underperformed most energy stocks and the broader market this year.
It's a conundrum for investors, who can usually count on the "picks and shovels" companies that help produce a commodity to rally when the price of that commodity rises.
But not this time. Shares of SLB and Baker Hughes fell in January when Saudi Arabian Oil Company, commonly known as Aramco, said it was backing away from plans to increase its oil production capacity to 13 million barrels a day from 12 million. The decision means that Aramco won't be spending as much to drill in new areas, thus reducing its need for services companies.
So while the Energy Select Sector SPDR is up 11% this year, and Exxon Mobil stock hit a record high last week, the services companies have lagged behind. Several Middle Eastern services companies have said in recent weeks that they have suspended operations for some of their jackups, which are oil rigs used in offshore exploration. Some disclosed that they were working for Aramco.
Among the impacted companies is Valaris, an offshore drilling contractor based in Bermuda with operations on six continents. Valaris stock is up 3% this year, but has dropped 5% in the past week. Other smaller oil services companies have done better, although the smaller names tend to attract less attention from investors.
Outside of Saudi Arabia, oil activity has been mixed, with rig counts staying relatively flat in most of the world, but offshore drilling activity picking up.
It isn't clear whether all of the large multinational oil service companies will be directly impacted by Aramco's decision. SLB, formerly known as Schlumberger, reaffirmed its 2024 guidance after the Aramco announcement.
"We continue to work very closely with Saudi Aramco, and our understanding is that all ongoing oil and gas projects remain intact and that only two offshore oil increment projects not yet started will be suspended," CEO Olivier Le Peuch said in a statement at the time.
The company declined to comment this week in advance of reporting first quarter earnings on Friday. SLB stock is down 1% this year.
Baker Hughes and Halliburton, the two other big U.S. oil services companies, also declined to comment about whether they will be affected by Aramco's decision. Both companies report earnings next week. Baker Hughes stock is down 4% this year. Halliburton, which is more focused on the U.S. market than competitors, is up 7% this year but has been trending down recently.
Citi analyst Scott Gruber believes that all three companies have some exposure to Aramco. He reduced his adjusted 2024 earnings estimates for all three, by 1% or less.
Even if the large oil services companies don't lose contracts because of Aramco's decision to backtrack, they could be hurt by the overall decline in demand for oil services and equipment.
"This potential decline could affect both contract awards and extensions, impacting pricing levels in the jackup market," wrote Rystad Energy analyst Amr Mahmoud in February. "The diminishing demand for rigs may also influence dayrates, which have experienced a 50% increase since the period between 2019 and 2021, currently averaging around $120,000 to $130,000 per day."
Write to Avi Salzman at avi.salzman@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 17, 2024 12:44 ET (16:44 GMT)
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