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North American E&Ps, OFS Sector Likely to Report ’Substantial’ Investments, Higher Pricing, Say Analysts

Whether the optimistic outlook permeating the energy sector is more cautious or full-speed ahead will become increasingly clear in the coming weeks as operators unveil their year-end earnings results and, more important, their spending plans for 2017.

Fourth quarter and year-end 2016 results for the oilfield services (OFS) sector kicked off with No. 1 Schlumberger Ltd. (SLB), which held an upbeat conference call Friday. CEO Paal Kibsgaard said the upcycle has begun, with growth in exploration and production (E&P) investments to be “led by the North America land operators, who appear to remain unconstrained by years of negative free cash flow as external funding seems more readily available, and the pursuit of shorter-term equity value takes precedence over full-cycle returns.”

General Electric (GE), which is working on a $32 billion deal to buy into Baker Hughes Inc., also reported on Friday. Halliburton Co., the No. 2 global operator, issues its results Monday, followed next week by Baker Hughes, Helmerich & Payne Inc. and proppant provider Carbo Ceramics Inc.

SLB, considered the industry bellwether, was expected to offer a roadmap on North American (NAM) top-line progression, according to Coker Palmer International (CPI). CPI analysts were training their ears for SLB’s view about whether the NAM market is in fact tightening, particularly for pressure pumping and sand.

NAM Spending Rising 19%

Earnings results overall should “lean to the positive, building on cautious optimism in the third quarter and anticipating an E&P investment inflection in 2017,” said Sanford Bernstein & Co.

E&P investment for 2017 is expected to increase 9% globally, “with a substantial 19% rise in North America,” said Bernstein’s Colin Davies. “The U.S. rig count is already up 62% since the trough in June.”

The energy industry is at an inflection point, he said. Bernstein uses three primary sources to forecast E&P spending -- a proprietary model to aggregate all sources of available cash, the reinvestment ability, and investment cycle of ongoing projects; guidance when available and forecasts from its E&P teams; and an evaluation of 5,100 projects worldwide to determine which project types and locations will drive investment.

This year’s global E&P capital expenditures (capex) should be led by the United States and Canada, rising by 19% from 2016 to $167 billion, Davies said. Global spend should approach 9% growth to around $522 billion.

“Since the highs of 2014, North American capex has decreased by 56%,” Davies noted. “International E&P capex will inflect but lags North America, growing 5% to $355 billion in 2017.”

U.S. Independents Outspending Majors

Most of this year’s increase in capital outlays will be driven by U.S. independents, not the majors. The majors “have guided capex down in 2017 by 8%” because of “dividend protection and stronger capital discipline intentions,” Davies said. “By contrast, U.S. independents will increase investment by nearly 25%.”

Spending beyond this year is increasingly moved toward offshore projects as oil prices recover toward $70/bbl in 2018, Bernstein is forecasting. “Incremental investment growth point forward 2018-2020 is levered to offshore (versus onshore).”

Prices for OFS already is ticking higher, a plus for the beaten down sector. Since last June, Halliburton’s stock price is up 22% and the onshore OFS drillers overall have risen 40%, Davies said.

Going forward, “particular attention will be given to pressure pumping, where contract pricing discipline and the return to positive margin is critical. A lower capital intensity recovery on top of pricing improvement is key to a constructive thesis. We need to see that equipment reactivation spend is under control and that pricing discipline is in place to adequately cover rises in the cost base, particularly in labor.”

Evidence that reinforces a strengthening environment has to be seen,“particularly on pricing,” Davies said. “However, any miss, particularly a pattern across the U.S. sector, could trigger a pullback.”

The “tone-setters” for earnings results are expected to be SLB and No. 1 pressure pumper Halliburton, said analysts at Tudor, Pickering, Holt & Co. (TPH).

Don’t Underestimate The ‘Big Dawg’

The companies’ “two masterful (near-term) expectations managers will both clear the 4Q2016 earnings expectations bar, but we contend that what will matter more (given how much OFS stocks have run in recent months) is how they frame what they’re seeing with regard to oilfield activity and pricing levels across their global geomarkets to start this young year.”

For Halliburton, history has shown “that it doesn’t pay to underestimate the North American pressure pumping industry ‘big dawg’ coming off of a severe industry downturn,” according to TPH.

Energy macro work “suggests that the U.S. onshore oil patch will only need to add 120 rigs (versus current Baker Hughes U.S. land rig count of 634) by year-end 2017. That said, as we look back at the second half of 2016, the reality is that U.S. land rig count activity surprised us to the upside both in 3Q2016,” averaging 104 rigs, which was 26% higher sequentially.

TPH analysts are keeping an eye on whether public and private E&P companies “collectively continue to add rigs” at the same pace they did in the last half of 2016.

For NAM pressure pumpers, a “dual headwind” may carry them through this year, as more fleets are put to work and better pricing prevails. Well site service providers in turn may begin replenishing the starved inventories of parts/components for their operating assets, according to TPH. 

Meanwhile, U.S. and Canadian E&P companies may “increasingly seek out new well completion technologies, which enhance efficiency/safety.” The onshore companies also may turn to proppant suppliers that help minimize completion schedule disruptions.

Recent conversations with TPH clients indicated that more than 60% plan to at least hold or add to their energy positions this year, the firm said. The OFS sector “was the overwhelming favorite, as over 67% of the respondents expect the group to see the most outperformance this year.”

The five-year outlook “tends to favor the E&Ps, with 50% of investors seeing the most long-term upside in upstream companies.”

NGI’s Shale Dailywill be covering many North American-focused oil and gas operator results in the coming weeks. A calendar listing is available on the website.

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