Mixed Earnings Results For Oilfield Services Companies Outshine Valuations

by: Stone Fox Capital

With the dramatic fall in domestic natural gas prices during 2012, the results of the domestic oilfield services firms have been increasingly scrutinized. The performances have been mixed and the results have been very location specific as expected. The stocks have all headed lower.

The key is location, location, location. While the stock market has obsessed daily about the natural gas market in the US, just about every other market whether oil or natural gas around the world is very robust. This provides plenty of opportunity for the best positioned stocks that have been sold off with no regard to location.

Naturally results can be relatively predicted based on a companies exposure to domestic natural gas. The less the better. Hence Baker Hughes (NYSE:BHI) preannounced bad results and Basic Energy Services (NYSE:BAS) reported bad numbers. On the other hand, Haliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) had generally good results though analysts had reduced expectations. Other major players like C&J Energy Services (NYSE:CJES) and Weatherford International (NYSE:WFT) have yet to report.

Below are some of the major highlights from the companies that have already reported.

Industry Highlights

  • Liquids areas are starting to feel some pricing pressure as crews and rigs get moved from the gas areas.
  • Deepwater remains strong .
  • North Africa is picking up with Libya expected back to normal levels in 2013.
  • International rig counts expected to jump 10% in 2012.
  • Oil expected to remain high with little spare capacity in non-OPEC areas.

Now lets review each individual report for more specific information on each company.

Baker Hughes

Back on March 21st, this company issued an outlook for Q112 that disappointed investors. The company blamed the continued shift in US rig activity for decreased fleet utilization and lower pricing for the Pressure Pumping product line. Personnel and logistics costs are also hitting margins as the company must relocate crews to liquids-rich basins.

The company's North Americas operating profit before tax is expected to slump to 13.7% from 18.7% in the Q411.

While not providing a lot of details since this was just an update and not the earnings report, investors were clearly disappointed and have sold the shares down to 52 week lows around $40. Analysts still forecast somewhere in the $4 range for 2013 earnings per share suggesting the forward PE of around 10.

Considering Baker Hughes has now warned three consecutive quarters maybe their results should not control the sector.

Basic Energy Services

This company reported earnings last week after providing an update the week prior. Results were generally disappointing sending the stock down though its unclear why investors weren't prepared for weak results. Not only had the company missed earnings most of 2011, but Baker Hughes provided plenty of warnings.

The company still reported solid profits of nearly $20M and only slightly down from Q411. The disappointing part is that revenue actually rose 5% sequentially so the biggest culprit was rising costs.

Profit margins were hurt by rising labor costs and several non-recurring items though management expects lower pricing going forward to eat away any benefits from the reduction of one time expenses.

Basic saw similar issues with the Pressure Pumping product line and hence has substantially lowered capital spending for 2012. The new program calls for spending $175M to $200M from the announced plan of $250M.

Unlike Baker Hughes, the stock hasn't plunged to new lows. It hit double bottom from late September 2011 providing some support for a bottoming process.


This company reported results last week that generally pleased the market. It only saw a modest decline in North America operating margins unlike the prior two companies. Haliburton also had great improvements in International markets impacted by 2011 issues.

Naturally it was negatively impacted by disruptions in the supply chain and cost inflation hurt margins. Still investors need to understand that revenues and operating income in North America grew over 40% from 2011 levels.

Haliburton saw strength in deepwater activity in Brazil and Latin America overall. It also saw higher profits in Iraq and improved activity in North Africa and Nigeria.

Regardless of the better than expected results, expectations for the rest of 2012 continue declining. The stock remains close to 52 week lows as well.


The company announced earnings on Friday that generally beat reduced expectations. Again net income was down 12% sequentially though up 35% from 2011.

It blamed normal seasonal slowdown for lower income as much as pricing pressure in North America. Good progress in global exploration and deepwater activity helped offset some of that weakness.

Schlumberger is more international focused then the other stocks so it shouldn't be that surprising that the company had decent results.

It also saw strong land activity in the Middle East and North Africa along with seismic work. The company expects rig counts in international markets to increase by more than 10% as oil prices remain strong and international gas prices remain solid.

Schlumberger has the strongest stock of the sector. It appears ready to breakout, unlike the others.

Next To Report

This brings us to the two stocks that haven't reported that are included in our models. Both companies are located better than the general group, but it hasn't helped the stock prices so far. Will the results prove the market wrong?

Weatherford International

Of the domestic majors, it has the largest exposure to the international markets and limited domestic natural gas business. For more details, read Weatherford: A Good International Oil Services Play. If the company can avoid further tax complications, it seems logical that Weatherford could lead the sector as it benefits from being located outside domestic gas. It also has the second largest international book of the four majors.

The company isn't the best operator hence the stock is hanging near 52 week lows, but it is one of the best located for the current market.

C&J Energy Services

Though 100% domestic focused, the company is completely in liquid basins mainly in the Eagle Ford and Permian Basin. Though facing some of the same pricing pressures, C&J Energy shouldn't occur any of the relocation issues of the competition.

The company has market leading margins so it will be interesting to see how they hold up in this environment. Similar to Weatherford, the stock trades close to 2012 lows and not far from post IPO lows back in October.

If the company comes close to matching 2012 analyst estimates of $4 per share, it is the cheapest stock in the sector by far with the stock trading in the $16s.


The sector is extremely cheap considering it only faces issues with one market on one continent. The good companies have been able to avoid blowups and should probably be bought on any further weakness. With the focus on ramping up industries in North America to take advantage of the low natural gas prices, it might not take long for not only prices but demand to rocket higher.

Disclosure: I am long CJES, WFT.

Additional disclosure: Please consult your financial advisor before making any investment decisions.