Oilfield Services
Credit Suisse Comment
It's Always Darkest Before the Dawn - North America Rig Projections
We are convinced that the US rig count is going higher. We expect the
rig count to close out the year 130-170 rigs higher than current levels and
momentum is still positive, pushing the expectations to the higher end of the
range. We think that “cautious optimism” will be the corporate message, but
the 3-5 year outlook is a positive backdrop, the current US rig count is very
strong, and we are starting to see “green shoots” emerging. We would be
overweight US-focused companies leveraged to the rig count or completions.
Darkest before the dawn: We understand the concern that has crept into
the market recently with several large companies’ activity projections not
being realized. But as noted in our initiation piece, the rig count typically
quits going down in March and starts going up in April. We forecast the rig
count several different ways and measure momentum as well as direction
and volume. We forecast footage and wells also but the “lead indicator” is
still rig count. We show the rig count down 5%-8% which translates to an
improvement from current levels by 130-170 rigs by year-end. Just
because it hasn’t moved, doesn’t mean it’s not going to.
Momentum. The momentum of the US rig count is higher for the third
straight month though the flattening of that slope into March has caused
concern and doubt about the rate of improvement in activity versus
expectations. Further, we are seeing a reversal of 10 months of negative
momentum into new budget cycle as clearly positive. While the drilling
recovery may seem more anemic than expected, it is still a recovery,
Out of the Pit. The second half of 2012 and the first half of 2013 appear to
be a cyclical earnings trough. US leveraged companies will likely miss
current quarter expectations because of misplaced expectations of activity
rather than issues with the market. US activity should move up sequentially
over the next three quarters. The current OSX consensus calls for EPS to be
up 33% next year. While some investors may be disappointed by the pace of
the recovery, it appears to be a recovery nevertheless. And in a hyper-
cyclical industry, those recoveries can be sharp.
Stock Calls: We would be leveraged to US drilling and completion activity
as higher utilization boosts margins from the lows and manufacturing
companies supplying the increased amount of equipment that drill and
produce the tight reservoirs currently in vogue. HAL, SPN, FET. Other large
caps with exposure to the U.S. include BHI and WFT. Manufacturing
companies with exposure would include NOV and FTI.
18 March 2013, 33 pages, 53 exhibits
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