US Oil Services’ Earnings: Q3 ugly, but Q4 even worse

UBS | Earnings season is here again… Never fun, but often interesting…

We had originally forecast that Q3 would be the bottom for both margins and revenues, particularly in N.Am. However, we have seen pricing and utilization pressure begin again due to the continued weakness in oil prices and the U.S . rig count. Additionally, Q4 will see the typical holiday seasonality which we believe will be more pronounced this year. Accordingly, we now believe either Q4 or Q1 – 16 will be the bottom in margins/revenues and then we expect a slow grind higher in 2016 (back – end loaded). Internationally we are also hearing of pricing pressure and expect softness in the E.Hemisphere in both Q4 and Q1 – 16 (more so for SLB than HAL given product mix).

 

Early look at 2016… all eyes on oil prices, however challenges will continue

We believe that oil prices will slowly recover throughout 2016 on gradual US production declines and modest demand growth. However, the oil service industry will still remain structurally challenged throughout 2016 and into 2017. We believe significant over – capacity will continue across all segments (land rigs, frac, offshore) even with a modest recovery in oil prices and rig count ($55 – $60/bbl and 900 – 1,000 land rigs). Overall, we expect total US land and frac utilization to remain anaemic at 60% – 65% fr om 45% today. N.Am margins should improve slightly but still generally remain single digit throughout most of 2016 (unless oil pxs surprise). However, the longer the rig count remains at today’s levels and the greater the pressure on E&P spending, the better it is for a recovery in 2017. Regardless, the industry will still need to shrink and many leveraged players will see severe financial distress in 2016.

 

Sector offers a trade, but are they real investments?

Only over the long – term We believe the group is essentially a play on crude over the near to intermediate term. However, that trade could still lead to substantial upside in the stocks. For an investment, we believe investors need to look at least two – yrs out as we see an environment of low oil prices and over – capacity in equipment continuing over the intermediate – term. Under a “lower for longer” oil price environment, US land offers some of the lowest oil breakeven economics particularly vs offshore. We believe you should buy when oil bottoms (i.e. you should already own the stocks) as waiting for the earnings bottom is too late. We favor: HAL & PTEN, NBR, HP