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%).
"The industry bellwether posted a solid earnings number in a tough quarter [and] signaled a robust North American market," Barclays says.
Stephens analyst Michael Marino reiterates an Overweight rating on the stock, expecting slow and steady revenue growth and solid incremental margins on a higher deepwater mix, overall efficiency gains and potential pricing gains in North America.
FBR Capital reiterates its own Outperform rating, noting SLB’s share repurchases and reiteration of guidance.
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.
Schlumberger (SLB +1.6%) CEO Paal Kibsgaard says he expects Q1 earnings to be much higher than in the same period last year, much of the growth coming from state-owned and independent energy companies that are spending to develop shale and other resources around the world, rather than multinational energy companies, most of whom are cutting spending.
The positive outlook comes despite harsh weather in North America and Russia that hurt demand for SLB's drilling, completion and other services for oil and natural gas producers.
Analyst consensus sees Q1 EPS of $1.22 after the company earned $1.01/share in Q1 2013.
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%.
Despite a bright outlook, Schlumberger (SLB +1.2%) is undervalued by as much as 28%, Barron's writes; shares trade for 16x expected 2014 EPS of $5.70 and 13.5x 2015 estimated earnings, a discount to the S&P 500 as well as SLB's historical levels.
Global demand for oil continues to grow, but increasingly reserves are located in areas that are hard to drill, a long-term boon for SLB's leading technologies; in the nearer term, big oil companies will spend more money in 2014 than in 2013 on SLB's services, and SLB continues to progress with its efficiency and reliability initiatives.
SLB's international presence means it is more exposed to Brent crude oil prices, not WTI prices, which could suffer as U.S. product outstrips refining capacity.
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.
Latin America contributes a significant part to U.S.-based oil services and equipment companies (OIH), which will struggle to achieve growth in the region during 2014 as a slowdown in Mexico and Brazil will be worse than expected, Credit Suisse says.
Halliburton (HAL) is in one of the most difficult positions because of its relatively high exposure to Mexico and Brazil, and its relatively low exposure to other Latin American markets will prevent it from mobilizing operations to more robust areas.
Schlumberger (SLB) and Weatherford (WFT) have relatively high exposure to the two countries, but have the possibility of offsetting losses by moving business to other LatiAm countries.
The firm says Baker Hughes (BHI) has the lowest exposure, with only 4% of its revenue from Mexico and Brazil.