Halliburton (HAL +3.2%) shares hit an all-time high as investors look past weather-afflicted Q1 North American profit margins to focus on the company's sunny Q2 forecast of 25% higher earnings with further increases to follow.
HAL is more dependent on U.S. operations than rival Schlumberger (SLB +1.8%), and a surplus of fracking equipment in the U.S. has driven down prices, but CEO David Lesar said in today's earnings call that growing demand in the Permian basin around Texas is helping to tighten that extra fracking capacity faster than expected; he says HAL won't have any problem filling its fracking calendar through the end of the year.
HAL is reiterated a Conviction Buy at Goldman Sachs, citing better than expected Q1 North American pressure pumping revenues that showed 2% Q/Q growth despite weather interruptions and its view toward strong revenue growth during the remainder of the year.
HAL makes up a hefty 11.9% of the Market Vectors Oil Service ETF (OIH +1.2%) and 10.4% of the iShares U.S. Oil Equipment & Services ETF (IEZ +1.1%).
Halliburton (HAL) +0.7% premarket after beating estimates for Q1 earnings and revenues, and forecasting Q2 EPS to grow 25% in Q2 to ~$0.91.
Unadjusted earnings were $0.73/share vs. a loss of $0.02 in the year-ago period that was weighed down by a charge related to litigation stemming from the 2010 Deepwater Horizon disaster.
North America revenue rose 5% and operating income was flat Y/Y, weighed by lower pressure pumping pricing, higher logistics costs and weather-related issues; HAL expects North America margins to approach 20% before the end of the year.
Latin America revenue and operating income fell by 9% and 8%, respectively, mostly on a drop in drilling-related activity in Brazil and reduced activity in Mexico; HAL expects full-year Latin America revenue and operating income to be in line with 2013 levels.
Deutsche Bank analysts raise their price targets on top oil service stocks (OIH), seeing increasing strength in a North American cyclical recovery with current forward earnings estimates perhaps proving to be conservative.
Basic Energy Services (BAS) gets a big price boost to $43 from $18, citing a recent activity update that indicated utilization levels had increased across all the company’s business segments.
Other top stocks rated Buy at the firm, including those whose price objectives have been raised: BHI, EXH, HAL, PTEN, PES, SLB.
Halliburton (HAL +2.5%), Schlumberger (SLB +1.4%) and other oilfield services companies should see a busy Q2 due to pent-up demand following a wintry Q1, leading to a solid rise in Q2 and Q3 demand for completion services, including pressure pumping, coiled tubing and proppants, according to a report from Sterne Agee.
The firm bases its outlook on reports of lower well counts during Q1, including a 2.5% sequential decline in well counts reported by Baker Hughes (BHI +1.7%); "this highlights our belief that wells per rig would drop in Q1 due to weather disruptions, and likely leads to a sharp rise in Q2 well completions."
The move toward integrated oilfield services offerings is a hot topic in the energy industry, and the large OFS companies - Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI) - are positioning themselves as one-stop shops for energy E&P customers, Credit Suisse says, believing it has spotted the biggest beneficiaries of the trend.
SLB is the most levered toward the trend but its integrated project management business is underappreciated by investors, the firm says; ~5% of SLB's workforce is dedicated to IPM, meaning the revenue contribution should be at least 5% and the contribution to margin even greater.
Baker Hughes (BHI +1.5%) agrees to acquire a Houston-based oilfield software technology company Performix in a deal that adds to its digital tools designed to enhance the performance of oil and gas reservoirs; the price is not disclosed.
BHI says the addition will expand its portfolio of field devices integration, real-time data management, visualization and analytics software.
Other oilfield service companies such as Halliburton (HAL +1.8%) are increasingly outfitting drilling rigs and other equipment with digital technology that can collect environmental data and change the trajectory of a drill bit to find the best spots in the reservoir.
Volker says WLL has plenty of access to the sand critical to the fracking process, and that he meets regularly with top executives of oilfield service providers Halliburton (HAL) and Baker Hughes (BHI) to review supply channels.
Concerns about supply may be coming from much-smaller oil and natural gas producers who lack Whiting's purchasing power, Volker says.
Patterson-UTI Energy (PTEN +4.3%) is upgraded to Buy from Neutral with a new $37 price target, up from $28.50, at Goldman Sachs on expectations for higher onshore pricing in North America that should help PTEN reach margin targets.
Goldman says it is adding PTEN, the second largest land driller and premier Marcellus and Permian pressure pumper, to its Conviction Buy list given its price increase forecast for drilling rigs and pressure pumping; Halliburton (HAL +2.3%), the leading U.S. pressure pumper, already is on Goldman's list.
Baker Hughes (BHI +1.5%) is upgraded to Buy from Neutral with a $72 price target, up from $60, at Goldman Sachs, based on increased forecasts for pressure pumping and expected margin improvement.
BHI is second only to Halliburton (HAL) in exposure to U.S. land, but its operating margins have lagged HAL’s; the firm has been skeptical of BHI's ability to improve North American margins to mid-teens by H2 2014, but has grown more optimistic now that rig activity is stronger than expected and pressure pumping prices could go higher.
Consensus estimates do not reflect the potential for improvement, which the firm sees an opportunity; also, despite a strong run YTD, BHI’s valuation looks compelling.
National Oilwell Varco (NOV -2.8%) is downgraded to Neutral from Buy at ISI Group, which says deepwater and ultra-deepwater rig demand are diminishing, and dayrates are weaker than the market appreciates.
Other oil services names also are lower: SLB -0.9%, HAL -0.2%, BHI -0.2%, NE -3.8%, CAM -1.3%, WFT -1.8%, SPN -2%, FTI -1.3%, DRQ -2.9%, KEG -0.9%.
BP, owner of 19.75% of Russian energy giant Rosneft, is the highest profile loser, according to Adams, and any sanctions that affect oil and gas flows to Europe or banking/capital flows, would "hit Rosneft and BP early and hard.”
CVX pipeline investments could be hurt, and it signed a 50-year deal to explore and develop oil and gas in western Ukraine; "a Russian takeover spikes that deal."
Halliburton (HAL), Baker Hughes (BHI) and Weatherford (WFT) all do business in Russia that could be prohibited if it is labeled a rogue nation.
Halliburton (HAL +2.3%) and Baker Hughes (BHI +3.5%) enjoy a boost from Raymond James analysts who are big believers in the two oilfield services providers, upgrading both stocks to Strong Buy as likely to benefit from increases in prices for pressure pumping as demand for fracking services rises in the wake of the recent increases in natural gas prices.
The firm updates its North American revenue growth assumptions for HAL to 20% in both 2014 and 2015 vs. prior estimates of 10% and 3%, and revises its EPS estimates $4.30 for 2014 and $5.85 for 2015, well above Wall Street consensus.
BHI could grow its North American business at a 17% clip in 2014, the analysts say in placing an $80 price target on the shares.
Wells Fargo has a slightly different take, downgrading HAL to Market Perform from Outperform on valuation; it prefers BHI and U.S. Silica (SLCA +1.3%) among companies that obtain a significant amount of their revenue from U.S. land drilling.
Schlumberger (SLB) finished shutting down its Iranian business in Q2 last year after losing $69M and facing a U.S. probe into its activities in several sanctioned countries, its latest 10-K filing shows; SLB says it has not bid on new Iranian oil contracts since early 2009.
Economic sanctions against Iran had pushed other oilfield service firms such as Halliburton (HAL) and Baker Hughes (BHI) to finish up their contracts and exit the country; last November, Weatherford (WFT) agreed to pay $252M in penalties for violating sanctions in Iran and other countries.
Several of the world’s largest oil companies, such as BP and Shell, also pulled out of projects in Iran.
Although the U.S. struck a six-month easing of some sanctions on Iran in November, officials are privately warning some of the same executives that any business now allowed with Iran must be limited to the six-month window of the deal.