Oilfield Services Update - July 16

[dan_s]

From BofA Equity Research 7-16-2021

What OPEC giveth, Shale to taketh away;
We ’ ve been hopeful OPEC had learned from policy missteps in the past that incentivized unnecessary US Shale growth. It seems, however, OPEC has forgotten that (1) mone y is still cheap and (2) US shale oil wells have exception al returns at $70/bbl. Yes , we realize US Public E&Ps are remaining capital disciplined , bu t the Private E&Ps, who still react to price signals, are in full -blown growth mode with (a) oil north of $70/bbl ( i.e . , robu st cash flow) , (b) exceptionally low service costs, and (c) still ample access to capital. The Private E&Ps won ’ t ruin the party yet, but they are surely capable of compressing the cycle if OPEC continues to inflate prices over the next 2 -3 years. Thus, with OPEC seemingly w illing to (again) trade price for share – just look at Saudi desire to extend current OPEC+ agreement through YE22 (from April ’ 22) – we see this as a net positive for US Shale. With this backdrop, we are pivoting back to US onshore as our preferred theme, making HAL our top pick, while we upgrade NOV to Buy and HP to Neutral but downg rade HLX to U nderperform .

NAM E&P spending forecast revised higher again
In our recent research, we ’ ve been noting a more positive outlook for US onshore given higher oil prices. Last month, we even bumped our ‘ 21/ ’ 22 NA M E&P spe nding fore cast, expecting growth of 10% / 27%. With today ’ s update, we are further revising this forecast, now expecting ’ 21 / ’ 22 NAM E&P spending to increase by 13% / 30%. This implies avg horizontal rig/active frac fleets of 487/247 in 4Q21 and 572/271 in ‘ 22 E.
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MY TAKE: There is definitely "Light at the end of the tunnel" for the oilfield service companies, as there is at this stage of every oil price cycle. However, there still isn't enough demand for the drillers and other oilfield services companies to significantly raise their rates. That will happen in 2022 when I do expect upstream companies to ramp up drilling programs. OPEC+ spare capacity will be gone within 12 months and the oil market will need the U.S. shale companies to ramp up production.