Outlook for Oilfield Services in 2015

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The world’s four largest oilfield services companies posted all-time share price highs in mid-2008 when crude oil prices were nearing a record high above $140 a barrel. Two of the four firms posted new all-time highs this past July, but since then their share prices have tumbled in a range of 16% to 42%.

Crude oil prices are falling for three primary reasons: increased production, primarily from North America; falling demand, particularly from developed nations; and a stronger dollar. The impact of falling prices has worked its way into the services companies’ financial results since the summer, just as it has through the offshore drillers that have seen their share prices fall by 50% to 70%. The oil patch is a tough place to make a living these days, and most observers believe it is going to get tougher.

At the end of last week, the North American rig count showed 116 more drilling rigs in use than were working at the same point last year. But the decline might be starting. In Texas there were 24 fewer rigs than in the prior week, Colorado’s rig count dropped by two and both Oklahoma’s and North Dakota’s dropped by one. With prices for services already intensely competitive, a cut to the number of working rigs promises to make the competition even fiercer.

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The count of North American horizontal drill rigs outnumber traditional vertical rigs by more than four to one, up from a ratio of three to one just a year ago. So far, at least, horizontal drilling and fracking have kept up a torrid growth pace both because producers are drilling more and because more drilling is needed to keep up with the pace at which a fracked well depletes. For the time being, the costs of drilling and fracking a well are quickly repaid by the production rate. If prices continue to drop, that could very easily change.

Worldwide rig counts are also higher. At the end of November there were 3,670 rigs, compared with 3,452 in November 2013 and 3,461 in November 2012.

A couple of trends are reasonably clear: services company stocks will follow crude oil prices and the situation is likely to get worse before it gets better. According to Plains Marketing, the posted price for West Texas Intermediate (WTI) on Thursday was $50.50; the posted price for North Dakota Sweet was $37.69 a barrel. At prices like that for Bakken crude, we should expect to see some consolidation among producers and, perhaps, even a few bankruptcies. None of these outcomes is good news for the services companies.

Halliburton Co. (NYSE: HAL) is currently the world’s second largest oilfield services company, with a current market cap of around $33.9 billion. When it completes its proposed merger with the fourth largest services company, it will still be the second largest services company in the world, but it should improve its position from less than one-third the size of the largest firm to more than one-half the size. The announced merger adds pressure on the stock, and that has affected its forward price-to-earnings (P/E) ratio, which is now 10.48. Halliburton’s quarterly dividend is $0.18 and the dividend yield is 1.9%. Short interest in Halliburton is more than double what it was a year ago, and the days to cover has dropped to one as the stock’s daily average volume has risen from around 11 million to more than 35 million. Shares were trading up more than 2% Friday, at $40.03 in a 52-week range of $37.21 to $74.33.

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Baker Hughes Inc. (NYSE: BHI) is the fourth largest service company in the world, with a market cap of about $24.4 billion, and it will become part of Halliburton next year if the merger goes through. Part of the reason for its relatively high forward P/E ratio of 15.27 is the prospective buyout, and that is also partly the reason the stock price is trading further from its bottom than either of the other two. The company currently pays a quarterly dividend of $0.17 a share (a yield of 1.2%). Short interest in Baker Hughes is about half what it was a year ago, and the bulk of that drop has come since the acquisition by Halliburton was announced. The stock traded at $56.41, up about 1.2%, Friday morning, in a 52-week range of $47.51 to $75.64.

National Oilwell Varco Inc. (NYSE: NOV) has a market cap of about $28.3 billion at Friday’s stock price. National’s forward P/E ratio is 11.10, and the company pays a quarterly dividend of $0.46 (a yield of 2.90%). Short interest in the company has more than doubled from about 6.75 million shares a year ago to 14.3 million this year. Days to cover has risen from 2.35 to 3.33, even though the average daily volume has jumped from 2.9 million to 4.3 million shares. Shares were trading Friday at $65.57, up about 0.5%, in a 52-week range of $60.88 to $86.55.

The largest oilfield services company in the world is Schlumberger Ltd. (NYSE: SLB) with a market cap of about $109 billion at Friday morning’s trading price. The Houston-based company pays a quarterly dividend of $0.40 a share (a 1.90% dividend yield) and its forward P/E ratio is 16.09. Short interest is just 3% higher than it was a year ago, and the days to cover has been cut nearly in half as trading volume in the shares has jumped from a daily average of 5.66 million to 9.82 million. Schlumberger’s share price was up more than 1% in the mid-morning Friday, at $85.13 in a 52-week range of $78.47 to $118.76.

Another way to play the services sector is with the Market Vectors Oil Services ETF (NYSEMKT: OIH). Since peaking in early July, the shares have lost about 36%. The four stocks we have looked at here are the top four holdings in the fund, so the share price decline is no surprise. Nearly a quarter of the fund (23.06%) is comprised of Schlumberger shares and another big chunk (10.94%) is invested in Halliburton. No other stock tops 9% of the fund. Shares traded up more than 1% on Friday, at $36.92 in a 52-week range of $33.54 to $58.01.

Share prices were following crude oil prices Friday, which had risen more than 1% as volatility in the crude oil market begins to wind up.

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