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Gold/Mining/Energy : Schlumberger - The biggest/baddest oil service company
SLB 41.45-0.8%Feb 12 9:30 AM EST

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From: Jon Koplik7/22/2024 1:53:38 AM
   of 216
 
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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