Oilfield Services Sector Update from Stifel - Jan 24

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dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Oilfield Services Sector Update from Stifel - Jan 24

Post by dan_s »

Stifel Nicolaus: Quick Takeaways from Large Cap Oil Service Results

Summary
SLB, BKR, & HAL each delivered better-than-expected 4Q22 results, provided positive commentary on 2023+, and reiterated a laser focus
on FCF cash returns. We believe the "beat and raise" portion of the stock performance is nearing an end, and shares will likely be driven
by execution, FCF generation, capital returns, and investor confidence (i.e., multiple expansion) in the sustainability of the cycle.
Key read throughs for upcoming earnings include:
1) international growth is gaining traction, with 15%+ growth expected in 2023 led by the Middle East;
2) pressure pumping is largely sold out for 2023, pricing is trending higher, and demand is strong for all levels of frac equipment;
3) HAL's newbuilds are additive to the fleet and not "replacement horsepower" yet;
4) customers remain focused on capital discipline and FCF; and
5) in-basin frac sand appears to be tight.
MY TAKE: This tells me that U.S. oil production growth will not be as high as EIA and IEA are forecasting because oilfield services equipment, trained crews and supplies are tight. Barring a Major Recession (which looks less likely each week), the global oil market will be extremely tight within a few months.

Key Points

• Implications for U.S. Pressure Pumpers: We continue to expect at least 15% North American upstream spending growth, and demand
for completion equipment appears strong. HAL's comments that its new e-fleets are not "replacement horsepower" suggests some capacity
additions in 2023, but we believe there is enough demand growth (~25+ fleets) to absorb announced new additions. It appears year-end
seasonality was limited in 2022, and we expect LBRT, NEX, ACDC, and PUMP to deliver strong 4Q22 results.

• HAL noted that lead times remain long for oilfield equipment, and competitors have remained capital disciplined. This supports our view
that capacity additions will be manageable in 2023.

LBRT announced after the close today (1/24/23) a doubling of its buyback to $500 million from the $250 million authorized in July 2022,
of which $125 million has been used to repurchase 8.2 million shares (4.4% of outstanding shares).
The remainder of the buyback
equates to roughly 25.5 million shares at today's closing price, or about 14% of the diluted share count. HAL, LBRT and frac peers'
focus on returning cash highlights capital discipline in pressure pumping, and likely limits newbuilds.

• In our view, the question around the frac companies is more about valuation, and whether EBITDA multiples can expand at least half
to a full turn and bolster shares in 2023. We see some upside potential to 2023-24 forecasts, but multiple expansion is likely key.

• As we noted in our outlook report titled Multiple Expansion Likely Key to Oil Service Stocks in 2023; Favorites Include BKR, TS, CHX,
WHD, and LBRT, shares of frac companies are "cheap" trading at sub 3x 2023 EBITDA versus historical median levels in the 4.5-5.0x
range. When we note we are looking for multiple expansion to drive performance, we are looking at historical median levels which
seems reasonable.

• International Growth: Results from the three large caps drilled home the point that international growth is gaining momentum, led by
the Middle East, and expectations for a multi-year upturn are intact. Outside the big three, the best leveraged plays to international
activity include ChampionX (CHX: $30.97, Buy), Tenaris (TS: $34.75, Buy) and NOV (NOV: $23.40, Buy). Hold-rated Core Labs (CLB:
$24.07, Hold) has historically fared well when international activity rises but as discussed in recent notes (Maintain Hold While Waiting for
International Traction), we are taking a wait-and-see approach on CLB.

• E&P Discipline Intact: As we await 2023 spending budgets from E&Ps, we expect capital discipline to remain intact. While E&P capital
discipline combined with equipment (rigs, frac crews, OCTG) and labor remain gating factors for growth in North America, the limited
production growth supports a longer cycle. Furthermore, we expect OPEC+ to continue to manage supply, particularly given the discipline
the cartel sees from U.S. producers.

• Frac Sand Tightness: Our friends at Infill Thinking recently noted a tightening in the Permian in-basin sand market as completion activity
rises a bit. While we don't think this is a repeat of last year when winter freeze led to a sharp supply shortness, it does support our view that
the frac sand market remains tight in 2023. This bodes will for U.S. Silica (SLCA: $11.60, Buy). In addition, frac player including ProFrac
(ACDC: $22.39, Buy) and Liberty Energy (LBRT: $14.56, Buy) should benefit. Prices as of close 1/24/23.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34465
Joined: Fri Apr 23, 2010 8:22 am

Re: Oilfield Services Sector Update from Stifel - Jan 24

Post by dan_s »

Liberty Energy Inc. (LBRT) is my Top Pick in the group mentioned by Stifel above.
> First Class Management
> Profitable
> #1 frac company

More and more of the Wall Street Gang are now using the term "multiple expansion" because it is starting to sink in the oil & gas will remain the primary source of energy on this Earth for many more years.

Multiple Expansion requires a "Paradigm Shift", away from the lies of the Climate Change Wackos and back to the reality that oil prices are much more likely to go over $100/bbl than back to $60/bbl.
> OPEC+ has very little if any spare capacity.
> SPR draws are not a sustainable policy.
> We are still no spending enough of exploration to find the oil reserves needed to offset depletion. We may be much closer to "Peak Oil" than people think.
> We will piss away $Trillions on wind and solar projects that will have very little impact on oil demand. Even coal will remain in high demand.
Dan Steffens
Energy Prospectus Group
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