By Jinjoo Lee
Executives at firms providing picks and shovels for the oil-and-gas industry are sounding a lot less bullish today than they were earlier this year. But shares in some might have been unduly punished.
Oil-field service giant SLB -- formerly known as Schlumberger -- on Friday reported slightly worse-than-expected results, with revenue increasing 10% in its third quarter compared with a year earlier, below Wall Street expectations of 11% growth. Net income was up 6%, below analyst expectations for an 11% rise. Chief Executive Olivier Le Peuch said on a Friday conference call that customers were more cautious about spending in the quarter.
For 2025, the company said international upstream spending could grow by a low to middle single-digit percentage, while spending in North America is expected to remain flat or decline slightly. "From where we were a year ago, there's definitely a reduced expectation of spending growth," said Roger Read, an equity analyst at Wells Fargo.
It isn't hard to see why: Oil prices are down about 5% year to date and 20% over the past 12 months, something SLB's Le Peuch attributed to strong non-OPEC production, uncertainty around OPEC+ supply releases, weaker demand from China and softer economic growth in the U.S. and Europe. The Organization of the Petroleum Exporting Countries itself earlier this month reduced its oil-demand growth forecast for the third consecutive time, but the broader group, OPEC+, has said it would step up oil production in December. Meanwhile, weak natural-gas pricing has damped output from U.S. natural-gas producers.
Spending on short-cycle resources such as U.S. shale has been more pressured because those tend to respond more quickly to short-term commodity prices, while investment in long-cycle resources look more resilient, according to SLB. This is a relative advantage for SLB, which has higher exposure to long-cycle weighted international customers. The company also derives about 40% of its revenue from offshore upstream spending, according to a report from Morgan Stanley. Every $10-a-barrel decline in oil prices causes a roughly 5% to 10% reduction in capital expenditures for short-cycle production, while the same move causes just a 1% to 2% fall in spending for long-cycle resources, according to Morgan Stanley.
The outlook is therefore tougher for North America-focused service firms such as Liberty Energy. The company said in an earnings call on Thursday that slowing activity has pressured pricing for its services and that it plans to temporarily reduce its deployed fleets by roughly 5%. Its shares fell 8.9% following the call. Liberty Energy said that some smaller service companies are falling into insolvency and that their investment in equipment is below attrition levels, implying that industrywide capacity is shrinking.
What hasn't helped equipment providers is the continuing productivity gains among producers from improving technology and sector consolidation. Liberty Energy said industrywide fracking efficiency is at its highest levels, noting that lateral wells are getting longer. Consolidation among producers has also meant the combined companies could run fewer rigs among contiguous areas, leading to better productivity. U.S. oil production per rig rose 13% last year and is expected to expand by another 15% this year, according to estimates from Wells Fargo.
Oil-field service company stocks have taken a much bigger hit than commodity prices or their oil-and-gas producer customers. While oil prices are down about 5.2% and a basket of producers is down about 1.5% year to date, shares of SLB and competitor Halliburton are down 19% and 22%, respectively. As a multiple of earnings, both companies' shares also trade at substantial discounts to their historical averages.
The selloff in SLB does seem overdone, particularly given its higher international exposure and record of expanding profitability. Its adjusted margin in terms of earnings before interest, taxes, depreciation and amortization has risen year-over-year for the past 16 quarters. For now, SLB notes that industrywide equipment availability remains tight. Slowing activity could bring pricing pressures, but SLB has a strong digital solutions business -- one that allows customers to mine data during exploration or production -- that helps it charge high prices. Cash flows also look healthy: SLB generated $1.8 billion of free cash flow last quarter, 36% higher than analysts expected. The company is on track to return more than $3 billion of cash to shareholders through buybacks and dividends this year and expects to return $4 billion next year.
Prospects for oil and gas don't look very bright at the moment, but that shouldn't dim investors' views of all oil-field service companies.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
October 21, 2024 07:00 ET (11:00 GMT)
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