Bill Costello's  Instablog

Oilfield Service Second Quarter 2010 Earnings Preview

SUMMARY

We think second quarter earnings for the service names will come in at or above current first call

consensus numbers. These strong earnings will be led by increased activity and improvements in pricing

across almost all markets. The companies that are most North American land oriented will see the

greatest pick up in activity and margins especially if they are leveraged to the emerging shale plays.

INDIVIDUAL COMPANIES

Baker Hughes (BHI) buy rated: BHI reports 8/3 with an 8:30 Eastern conference call. The dial in number

is (800) 374-2469 confirmation “Baker Hughes conference call”. We think BHI will report 44 cents,

which is 2 cents above the 42 cent consensus. It should be a solid quarter with the integration of BJ

Services a key talking point on the call and forward guidance another focus due to the GOM disaster.

Cameron (CAM) buy rated. CAM has not yet chosen a date for their earnings release but it should be late

July or early August. We believe CAM will report 56 cents or 2 cents ahead of the 54 cent consensus.

We think the beat will be driven by the strong North American land trends and think the call will focus

on the outlook for the rest of the year and the impact from the GOM.

Core Labs (CLB) buy rated. CLB hasn't chosen a date for their earnings release but it will probably be

the last week in July. We believe CLB will report 74 cents or 2 cents ahead of consensus of 72 cents (we

have adjusted our estimates for the early July 2-1 stock split). The call should focus on their high returns

and the outlook for continued growth.

Halliburton (HAL) buy rated. HAL reports earnings 7/19 with a call at 9:00 Eastern. The dial in number

is (703) 639-1308 with no code. We expect earnings of 36 cents or 1 cent above the first call number of

35 cents. We should see the strength of North America drive these results and the conference call should

center on the trajectory of North American activity and the magnitude of margin increase this activity

drives. Forward guidance will be important as this kicks off oil service earnings season.

Schlumberger (SLB) buy rated. SLB reports 7/23 with a call at 9:00 Eastern. The dial in is (800) 230-

1096 with the code “Schlumberger earnings conference call”. We expect 68 cents spot on the 68 cent

consensus number. We believe the forward outlook and the restructuring of the North American business

unit will be the focal points of the conference call.

Weatherford (WFT) hold rated. WFT reports earnings 7/20 with a call at 9:00 Eastern. The dial in

number is (866) 730-5763 password “Weatherford”. We think WFT will report 8 cents or 1 cent above

the First Call consensus of 7 cents. We think the key talking points from the call will be the improvement

in the global markets and the possibility of margin improvement. Also we would expect WFT to high

light the fact they have the least GOM exposure of their peer group.

VALUATION

We find the valuation of the group extremely attractive with the market pull back and the selling

associated with the GOM disaster. The group is trading at 16 X our (reduced) 2011 earnings estimates

(14.8 X if we exclude CLB from the calculation). The group has traditionally traded over 20 X forward

numbers. On an EV to EBITDA basis the group trades at 6.7 X 2011 numbers (ex CLB) versus a

historical range of 8.5 to 10 X. We feel our numbers are conservative based on our best estimates of the

activity slowdown in the GOM

CONCLUSION

We find Halliburton (HAL) to be especially attractive in light of their possessing the lowest forward

multiple at 13.5 X 2011 earnings combined with the best exposure to the oily shale plays such as the

Bakken Shale. We see 50% upside to our target price from these levels.

We also like Baker Hughes (BHI) due to the low valuation and the potential upside from the BJ Services

acquisition. BHI trades at 14.1 X 2011 earnings and at 6 X 2011 EV/EBITDA.

We would highlight these as the two most attractive names in our oil service universe followed by

Schlumberger (SLB), Cameron (CAM), Core Labs (CLB), and Weatherford (WFT). We do think all these

names will have good second quarters and are poised to outperform in the second half of the year

BULL RUN ENERGY RESEARCH

60 STATE STREET, STE. 746

BOSTON, MA  02110

                     CONTACT INFORMATION

            WILLIAM E. COSTELLO, CFA

                  BULLRUNENERGYRESEARCH@COMCAST.NET

                  617.878-2030

Natural Gas Storage

For the week ending May 21, 2010

Energy Information Administration weekly storage report.

• The EIA reported a 104 Bcf injection into storage vs. consensus estimates of 101.
• This was above both our 99 estimates and street numbers.
• This puts us at 2,269 Bcf (2.3 Tcf) in storage vs. 2,198 last year and the five-year average of 1,951 bcf.
• This injection was between last year (106) and above the five year average (94)
• We are now 71 Bcf above last year and 318 above the five-year average.

SUMMARY:

We view this injection as bearish to the natural gas market and the gas-weighted equities. Working gas in storage is still way above the five-year historical range and above last year. Between now and November 1 we typically inject +/- 1,700 Bcf so we seem to be on track to enter next year’s winter with just about 4,000 Bcf (4.0 Tcf) in storage. This would be an all time high. The numbers we look at indicate we are over supplied by about 1.5 Bcf per day and either supply must slow or demand grows to alleviate the problem. We have seen some signs of slowing activity but the rig count hasn’t shown any meaningful signs of turning down yet.

Natural Gas Storage Preview

For the week ending May 21, 2010

Energy Information Administration weekly storage report will be released at 10:30 Thursday.

• The consensus estimates is an injection of between 90 and 105 Bcf.
• Last year the injection was 106 Bcf and the 5-year average is an injection of 94 Bcf.
• Based on weather and last week’s reading a range of 95 to a low 100’s number seems right.
• Our model says 99.
• If the injection is 99 Bcf that would put us at 2,264 Bcf (2.3 Tcf) in storage. That would be 66 above last year’s number and well above (by 313) the 5-year average.
• This injection should come in between last years and the five-year average number.

SUMMARY:

We view this upcoming injection as an in line number, The Street is trying to warm up to natural gas and this   injection would be viewed as neutral in our opinion. A number below 100 would be slightly bullish for natural gas and at 90 or less you would see a relief rally. A number over last years would be bearish. However even with a bullish injection we are above last year by a large amount.  We just finished a mini analysis of storage trends and feel we should end the injection season in an over supply but not a disastrous position. Last year we injected +/- 1.7 Tcf during the remainder of the season and the five-year average is similar. If we proceed with similar injections this year we would be faced with over4 Tcf in storage next winter, which would be an all time high. If we inject 1 Bcf per day less than either last year or the five-year average we would end up with between 3.7 and 3.8 Tcf in storage. On the positive side we think industrial demand will improve and with our low natural gas prices less LNG will hit our shores this summer and fuel switching is positive on the margin.  However our concern is on the supply side, as production continues to grow. We need to slow the pace of drilling and while we saw some evidence of that happening the most recent data point from the Baker Hughes rig count was very disappointing. We think a decent number this week would support a $3.90 to $4.00 type number is a sort of floor for natural gas prices but we do see the supply and demand factors limiting any meaningful upside to the gas price. Even though oil prices have pulled back we feel more comfortable with the price outlook in that market than we do in the natural gas markets. For that reason:

. We still favor oil centric names at this point in time but we feel the worst may have passed for the gas centric names.