I've been slow to talk about oil services companies during this downturn in oil, and even slower to recommend one or two. I believe the timing of the inevitable upturn in oil prices and oil stocks will affect oil services far later than, for example, the independent E&Ps, which I have been accumulating.
Let's talk about why -- and at least put two oil services companies on our radar for later: Schlumberger (SLB) and Helmerich & Payne (HP).
The large macro moves by oil E&Ps during this downturn have been to radically slash expenditures, turn off or hold off completion of many new projects and concentrate on increasing the efficiency of projects already online or nearing completion.
We can see the results of this in many concrete ways -- the first in the number of active wells in the U.S., down to a paltry 464, according to the latest Baker Hughes (BHI) rig count report, from a high of more than 1,600 in 2014. Not surprisingly, this has led to a greatly reduced budget that E&Ps are spending for oil services in general and increased competition for the services that are still being contracted. The big three, Halliburton (HAL), Baker Hughes and Schlumberger, have all seen massive drops in revenues.
Take Schlumberger, for example, by far my favorite of the big three. In the previous quarter, the company experienced a 39% drop in revenues to $7.74 billion, most of that coming from the declines in the U.S. market. It posted its first loss in 12 years. Guidance from the company wasn't any better, with a revenue expectation of an even lower $6.5 billion from the current quarter. (Schlumberger is part of TheStreet's Action Alerts PLUS portfolio.)
The rise in oil prices from the lows of $26 to briefly above $40 has "floated all boats" in the energy sector, including oil services and particularly with shale "specialist" Helmerich & Payne, moving up from $45 a share to briefly above $60. But this is a false, or at least premature, appreciation in the share value of the services sector as opposed to the benefiting E&Ps.
And here's why: Many of our beloved E&Ps can and have adjusted their expenses, outputs and expectations for revenues. They have cut their top-line costs while increasing the efficiency and output of each well already working, dropping break-evens and proving their capability to survive a sub-$50 oil price for quite a while yet, without adding new rigs.
When oil prices do begin to rise based upon a true production shortage, revenue increases and share valuations for these shale players will be immediate. Unfortunately for the oil services group, this is not so. They must wait for a truly growing rig count and reduced competition to begin to see revenue growth again.
This comes well after the prices of oil -- and the margins for shale E&Ps -- have already begun to rise significantly. Quite simply, oil prices will move up long before rig-count numbers do.
When that rise does come, however, I prefer Schlumberger for its continuing leadership in margins among the biggest services names and Helmerich & Payne for its leadership role in North American shale drilling services. Keep these two on your radar -- for later.
For now, I'm still going to concentrate on the group that I feel will benefit first from a true and sustained turnaround in oil prices when it comes: the independent exploration and production companies.