With a flat U.S. horizontal rig count and a lower-priced backlog still to be worked through, the oilfield services sector didn't have a lot of "classic" catalysts to propel them in 2Q2013, according to a preview by Tudor, Pickering, Holt & Co. (TPH).
What worked and what didn't should become more transparent this week and next, with Noble Drilling Inc.'s earnings conference call on Thursday, followed by Schlumberger Ltd. and Baker Hughes Inc. on Friday. Next week investors will hear from Halliburton Co. (Monday), Nabors Drilling Inc. (Wednesday), and Cameron International, Diamond Offshore, Patterson UTI and Precision Drilling next Thursday.
It was more than the flat rig count and the backlog that impacted the sector between April and June, said the oil service research team. The sector also faced a harsh Canadian spring breakup, drilling slowdowns in Mexico and expanding international operations.
"We've seen examples of hiccups that may be uncovered" by small and large operators, including a continued product overhang by Forum Energy Technologies Inc. and "slack time" by Nabors. "Our comfort level is greatest for large-cap diversifieds," like Schlumberger, Halliburton and Baker Hughes Inc., "where the international results/outlook should be solid and their U.S. businesses large enough where the results more or less will look like the industry..."
Analysts think horizontals spud and completions were "much improved" from the first quarter.
"For small-cap completions companies, results are likely just as variable as we've seen in the recent past," with median 1Q2013 pressure pumping revenues 2% higher on average, with companies ranging from 21% growth to minus 11%. "For manufacturers, we think orders matter less than margins/earnings performance this quarter. Strong revenue growth across that group is believed, but 1Q2013 operations/execution weren't up to snuff."
Whether U.S. drillings/completions slow down toward the end of the year is a question and it should be a "hot button topic" this earnings season.
"There are always some negative seasonal headwinds in the U.S. onshore each fourth quarter. That is normal; the collapse in activity (both drilling and completions) in Q42012 is not" (see Shale Daily, March 25; Dec. 19, 2012).
"A number of service companies are looking at 1Q2013/2Q2013 actual spend by customers, seeing what is visible for 3Q2013 and then wondering about 4Q2013 since current budgets would imply a slowing (in some cases dramatic). There doesn't seem to be visibility about 4Q2013 slowing, just rightful concern given that Q42012 is fresh in people's memories and year-to-date drilling efficiencies are strong."
Budgets "are being chewed through quicker at a given rig county," like in 2012, analysts noted. Since 2000, the only fourth quarters with much quarter/quarter rig count reduction were 4Q2001, 4Q2008 and 4Q2012." the final periods in 2001 and 2008 "were in the midst of cycle rollovers while 2012 was part of the multi-quarter sequential drilling contraction."