Silicon Investor - Halliburton-On the rise?

[Jon Koplik] WSJ -- after HAL and SLB earnings - write-up ......................................

Jon Koplik — 7/22/2024 1:53:14 AM

WSJ -- after HAL and SLB earnings - write-up ..............................................................

WSJ

July 20, 2024

HEARD ON THE STREET

Oil-Field Service Companies Ask: Where Did All the Wildcatters Go?

Drilling activity is weak in the U.S., but service companies’ margins remain strong

By Jinjoo Lee

Gone are the days of “Drill, baby, drill.” That doesn’t sound like great news for the companies providing the picks and shovels in American oil fields, but it isn’t wrecking their bottom lines, either.

The oil and gas rig count in North America, which never quite returned to pre-pandemic levels, has been steadily declining since hitting a peak in late 2022, according to data from Baker Hughes.

Halliburton on Friday said its rig count in the region declined 12% in the second quarter compared with a year earlier and that its revenue in the region fell 8%, the fourth consecutive quarter of decline. Similarly, competitor SLB said its revenue in North America dropped 6%.

With Brent crude fetching above $80 a barrel, oil prices are high enough for U.S. producers to pump more, but many are in the process of combining through mergers and acquisitions. This has led to less activity as companies find ways to operate with fewer rigs or work out new development plans. Meanwhile, weak prices for natural gas are keeping producers of that fuel on the sidelines.

Business is healthier abroad. Halliburton said its international revenue rose 8% year over year, marking the 12th consecutive quarter of growth in that business. SLB, which has higher exposure to international markets, said revenue abroad surged 18%, led by impressive 24% growth in the Middle East. Capacity-expansion projects are “in full swing” in countries including Saudi Arabia, the United Arab Emirates, Kuwait and Iraq, SLB CEO Olivier Le Peuch said on Friday’s earnings call. Though Saudi Arabia earlier this year said it would hold off on its oil-capacity-expansion project, it should keep services firms busy on unconventional gas fields such as Jafurah. The kingdom has ambitious plans to increase natural-gas production by more than 60% by 2030 compared with 2021 levels.

Halliburton’s shares fell about 5% on Friday and international-focused SLB’s shares rose about 2%, but both have underperformed relative to crude oil prices and the rest of the industry year to date. They are trading at substantial discounts to their historical average, with SLB’s enterprise value at about 8 times forward 12-month earnings before interest, taxes, depreciation and amortization, 26% lower than its 10-year average. On the same metric, Halliburton is trading 29% below its historical average.

The big shadow looming over service firms is the timing of the recovery in North America, if it comes at all. Halliburton, which relies on the region for about 45% of its revenue, said it doesn’t expect much improvement this year and expects revenue to decline 6% to 8% for the full year. Halliburton CEO Jeff Miller thinks activity should return in 2025 after producers digest their acquisitions and sell some noncore assets to smaller operators.

“Never bet against North American entrepreneurs,” he said on the call, referring to producers.

That is no sure thing, though, and even more consolidation may be in store next year. SLB’s business is more reliant on long-term expansion plans from national oil companies, but any weakness in oil prices could still weigh on activity. Notably, OPEC+ is set to unwind voluntary production cuts starting in October.

Despite those pressures, oil-field service companies have been able to keep profits and cash flow healthy. Both Halliburton and SLB reported higher operating margins last quarter compared with a year earlier and better-than-expected free cash flow. Years of capital discipline in the services industry is helping companies retain pricing power. Miller said industry-wide capacity continues to shrink, including at Halliburton, which retired some of its fleet last quarter. Healthy free cash flow should also translate to generous cash returns: Halliburton should be on track to return roughly $1.6 billion of cash this year, while SLB said it expects to return $3 billion. That translates to about 70% of expected free cash flow for both companies.

With so much bad news already baked into their stocks, any pleasant surprises in the U.S. oil patch next year or higher-than-expected oil prices could put fuel back in these stocks.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

Copyright © 2024 Dow Jones & Company, Inc.

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[Jon Koplik] Reuters -- US oilfield firms slip as Aramco's lowered capacity target sparks con...

Jon Koplik — 1/30/2024 10:37:14 AM

Reuters -- US oilfield firms slip as Aramco's lowered capacity target sparks concerns ..........................

Reuters

January 30, 2024

US oilfield firms slip as Aramco's lowered capacity target sparks spending cut concerns

Jan 30 (Reuters) -- Shares of top oilfield services provider SLB tumbled about 7% and those of its U.S. rivals fell after oil giant Saudi Aramco said it would lower its maximum capacity target.

Aramco, the largest oil company in the world, will cut its planned maximum sustainable oil production capacity to 12 million barrels a day (bpd) after being ordered by Saudi Arabia's government. The new target is one million bpd below a target announced in 2020.

Analysts said the move could reflect a change in Saudi Arabia's outlook for global oil demand and may be followed by Aramco curbing capital investment.

Shares of Halliburton and Baker Hughes were down more than 4% each. Shares of other energy services companies like Transocean and Seadrill were down about 2.6% each pre-market.

Oilfield firms have been riding rising international and offshore oil exploration and production, primarily from the Middle East and Africa, as U.S. shale firms keep a tight leash on drilling activity.

"The move seems a bit bizarre and I’m sure will hammer the stocks today. But a lot of the equipment / services are already locked up under term contracts, unless some have easy outs. Also still a lot of gas-related activity going on over there," said Raymond James analyst Jim Rollyson.

SLB, formerly Schlumberger, said in a securities filing last week that it was anticipating record investment levels in the Middle East, citing the significant expansion in Saudi Arabia and nearby oil states.

SLB and Halliburton did not immediately reply to requests for comment.

Reporting by Mrinalika Roy in Bengaluru; Editing by Sriraj Kalluvila

© 2024 Reuters.

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[Jon Koplik] WSJ -- Oil Doesn’t Have to Boom for These Companies to Thrive .....................

Jon Koplik — 7/26/2022 1:29:00 AM

WSJ -- Oil Doesn’t Have to Boom for These Companies to Thrive .............................................

MARKETS
HEARD ON THE STREET

July 22, 2022

Oil Doesn’t Have to Boom for These Companies to Thrive

Oilfield-service-company stocks are in the hole after demand concerns started pummeling oil prices. The reaction seems overdone.

By Jinjoo Lee

Oil-and-gas companies aren’t anywhere close to drilling as much as they did in 2014, but some oil-field service companies are squeezing out profit as if they were.

Schlumberger said on Friday that its revenue grew 20% compared with a year earlier and raised its full-year guidance. Halliburton, which has heavier exposure to North America, saw its top line grow 37% over the same period thanks to heady growth (55%) in the region.

Notably, Halliburton’s operating margins -- excluding charges related to its Russia exit -- reached 14.2% in the second quarter, a milestone not seen since the peak of the fracking frenzy of 2014. Schlumberger’s latest quarterly operating margin of 17.1% was its highest since 2015.

Drilling activity still isn’t what it used to be. Baker Hughes data shows that there are 23% fewer oil rigs in North America today than there were three years ago and 58% fewer compared with 2014. While oil-field service revenues are nowhere near their peak eight years ago, many years of belt-tightening and efficiency-finding has meant the businesses are able to eke out more profit on less drilling activity.

That, and continued supply chain bottlenecks, are adding up to a lot of pricing power. Halliburton Chief Executive Jeff Miller repeatedly said on the company’s earnings call on Tuesday that the company’s equipment is “all but sold out” in the North American market for this year. The company has started talking to customers about purchases in 2023, which already looks like a tight year for equipment, according to Mr. Miller.

Olivier Le Peuch, CEO of Schlumberger, said on a Friday call with analysts that tightness in equipment supply is “very visible” in North America and also broadening in international markets.

Baker Hughes CEO Lorenzo Simonelli said on the company’s earnings call on Wednesday that the demand outlook for the next 12-18 months is “deteriorating” as inflation diminishes consumer purchasing power and interest rates rise. But industry executives are signaling that there will continue to be strong demand for their equipment and services even if there is a slowdown in demand for hydrocarbons.

Mr. Simonelli noted that “years of under-investment” and the potential need to replace Russian barrels means there will need to be higher spending. While the two U.S. major oil companies -- Exxon Mobil and Chevron -- have reduced their combined capital expenditures by 64% since the drilling frenzy of 2014, service giants Halliburton and Schlumberger have cut their spending by an even steeper 73%.

There has been under-investment in drilling, but an even bigger one for equipment, which means it will take quite a drastic oil demand cut before oil-field service companies take a hit.

Markets appear to be baking in a full-fledged slowdown, though, for both. While Brent crude prices have slid 19% since the most recent peak on June 8, the S&P Oil & Gas Equipment Select Industry Index is down 32%, steeper than the 26% decline that an index of oil and gas producers has seen.

As a multiple of expected earnings before interest, taxes, depreciation and amortization, Halliburton, Schlumberger and Baker Hughes’ enterprise values are each at least 18% below their respective eight-year averages.

The risk that demand for oil-field services will decline appears lower than the possibility that oil demand will fall. Their services are getting costlier, but their stock prices look like a good deal.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

Copyright © 2022 Dow Jones & Company, Inc.

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[Jon Koplik] WSJ on : Schlumberger, Halliburton and Baker Hughes ...............................

Jon Koplik — 10/23/2021 1:18:07 PM

WSJ on : Schlumberger, Halliburton and Baker Hughes .......................................................

Heard on the Street

Oct. 22, 2021

Services Are Yet Another Snag for Oil and Gas

Drillers, whose discipline is leading to a tight oil market, are in turn facing a tight equipment market. Schlumberger, Halliburton and Baker Hughes are set to benefit.

By Jinjoo Lee

Scarcity sometimes begets more scarcity.

The latest source of shortage comes from the oil field service industry, which has less equipment and fewer employees after years of austerity. Meanwhile, oil and gas prices are near multi-year highs. All three major servicers -- Halliburton, Schlumberger and Baker Hughes -- said in their earnings calls this week that they are negotiating price hikes with their customers as a result. Higher labor costs, stretched supply chains and inflation are feeding into those price increases, too.

That isn’t such a bad thing for the three companies, all of which had to weather pricing cuts last year. But, as for many companies, it isn’t free from near-term snags. Hurricane Ida, which curtailed production in the Gulf of Mexico, put a dent in all of their third quarter revenues, and all three missed top-line expectations for the quarter. Baker Hughes in particular had a rough time; its digital solutions division was impacted by electrical component shortages around semiconductors, boards and displays. Since Tuesday, when the first of the three oil field services giants reported earnings, Halliburton and Baker Hughes shares have shed 1.7% and 8.4%, respectively. Schlumberger shares have edged down by 0.6%.

Equipment supply is tight enough, and oil and natural gas prices high enough, that some customers are starting tenders for services earlier than usual. It is hard to tell how much the scramble will affect energy prices. Directionally speaking, though, the equipment shortage isn’t likely to get better soon. Service companies tightened their belts earlier than their clients and all now plan to continue their spending discipline. Halliburton’s capital expenditure budget today is roughly a quarter of what it was seven years ago, the last time Brent crude prices touched $85. It plans to keep capital expenditures capped at 5% to 6% of revenue. If the market for services is tight today with the world’s producers pumping five million barrels less a day of oil than 2019, the situation isn’t going to get better next year when oil production is expected to exceed pre-pandemic levels.

Notwithstanding short-term hiccups, a tight market with increasing demand is a sweet spot for services firms. Both the Organization of the Petroleum Exporting Countries and the International Energy Agency expect oil demand to increase until at least the 2030s. That oil must be extracted somewhere in the world, even if U.S. drillers maintain discipline. Barring sudden discord between OPEC+ members or sudden drilling activity from large U.S. producers, prices seem likely to stay above pre-pandemic levels.

International service firms are in a strong negotiating position, and they are already leaner and more profitable than they were pre-pandemic. The shock of 2020 forced them to learn new capabilities such as remote monitoring for drilling. Schlumberger in the third quarter squeezed out more net income than the second quarter of 2019 on a revenue base that is 30% lower.

Halliburton is already shuffling some equipment to more lucrative jobs abroad. Moreover, the company notes that new fields are smaller and require more work to produce more barrels, which translates to more dollars. Servicers are also seeing that they can get a pretty penny (“pricing traction,” as Halliburton puts it) for selling low-emissions equipment, which will likely be in high demand in coming years. Baker Hughes’ digital solutions division seems well positioned to profit from helping firms monitor and manage emissions.

Despite the rosy outlook, service firms’ shares look cheap. On average, their price-to-forward-earnings ratio is 28% below their 10-year average. Their share prices have climbed out of a deep hole, but this is still a good opportunity to get in on the ground floor.

Write to Jinjoo Lee at jinjoo.lee@wsj.com

Copyright © 2021 Dow Jones & Company, Inc.

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[hdl] hal is a buy here

hdl — 6/4/2012 10:38:41 AM