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Q2 Earnings Overview for Oilfield Service Industry

We have already seen a few releases from S&P 500 companies in the Q2 earnings season. Major oilfield services companies will start reporting results starting Jul 21. Although our report shows that the Oil/Energy sector might post the healthiest earnings performance among all the 16 Zacks sectors, the story for the Zacks categorized Oil & Gas-Field Services industry is somewhat different.

The industry has been grappling with huge debt and low cash balances. On top of that, cash flow from core operations is getting weaker by the day. The April-to-June quarter of 2017 has not been able to reverse the unimpressive performance of the Oil & Gas-Field Services industry over the last few quarters. Most importantly, during Q2, the industry underperformed the S&P 500 index.

About the Oil & Gas Field Services Industry

Companies belonging to this industry primarily support drilling players in efficiently setting up oil and gas wells. These firms are mainly engaged in manufacturing, repairing and maintaining equipment required for pumping oil.

Halliburton Company HAL, Schlumberger Ltd. SLB, Baker Hughes, a GE company BHGE and Weatherford International plc WFT are four premier oil field services companies. These companies are often referred to as the ‘Big Four.’

Schlumberger, the largest player in the oilfield services industry, is expected to report Q2 earnings on Jul 21, while Halliburton – the second largest player in terms of market capitalization – will likely report on Jul 24. The companies carry a Zacks Rank #4 (Sell) while the Earnings ESP for the respective firms are + 6.67% and +15.79%, respectively. Hence, our proprietary model does not conclusively show an earnings beat for the firms this quarter.

Past Performances Lack Luster

Declining Cash Flow: The industry has not been performing well since the beginning of 2015. Our proprietary model shows that net cash flows from core operations in the industry has declined nearly 55% over the last two years.

Huge Debt Load: The industry is faced with a high debt level. From $6000 million in long-term debts at the end of 2013, the level scaled to $8,500 at 2016-end. Also, cash balance declined substantially last year to slightly above $4,500 million.

Industry Lags S&P 500

Pricing chart is generally referred to for analyzing the performance of any stock or industry over a period of time. The price chart clearly shows that the Oil & Gas-Field Services industry has underperformed the S&P 500 index throughout the second quarter.

During the aforesaid period, the index rose 2.7% while the industry declined 15.6%.

 

It is to be noted that in terms of the Zacks Industry Rank, the Oil & Gas-Field Services industry is among the weak performing industries. The industry is ranked #205 and lies in the bottom 20% of industries.

What’s Behind the Bleak Scenario?

Oil & Natural Gas Prices Weak

Oil and gas prices have been low for almost three years now and during second-quarter 2017, the prices of both the commodities slipped further. The prolonged weakness is owing to a persistently oversupplied commodity market.

During the April-to-June quarter of this year, oil and natural gas prices fell 8.4% and 5%, respectively. Also, OPEC’s historical production cut extension deal until Mar 2018 has failed to drive oil.

Natural gas is also an oversupplied commodity as is reflected by its inventory level of 2.816 tcf – as of Jun 23 – almost 7% higher than the five-year average mark (as per The U.S. Energy Information Administration).

Oilfield Services Players at a Disadvantage

Declining oil and gas prices act as a deterrent for exploration and production companies as it affects the cashflow. In fact, many upstream companies are cutting down on their capital investment for exploitation activities which has led to a decline in proved reserves.

These developments might reduce contracts for oilfield service companies.

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Weatherford International PLC (WFT): Free Stock Analysis Report
 
Schlumberger N.V. (SLB): Free Stock Analysis Report
 
Halliburton Company (HAL): Free Stock Analysis Report
 
Baker Hughes Incorporated (BHGE): Free Stock Analysis Report
 
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