Oilfield Services not looking good - Oct 7
Posted: Mon Oct 07, 2019 4:21 pm
by Connor Lynagh – Morgan Stanley
October 7, 2019
North America oilfield activity has continued to surprise to the downside as producers trimmed activity throughout the summer. We are lowering our macro deck once again; however, we see US E&P capex budgets only down in the mid-single digits in 2020 — better than many fear.
North America (NAm) activity continues to fade into year-end — lowering our macro deck again. While 2Q earnings calls provided somewhat of a preview of what was to come (see our 2Q EPS review here), NAm activity continues to disappoint, driving service demand and pricing declines across the spectrum. While pressure pumping pricing has faded modestly, we are hearing of larger steps down in land rig and frac sand pricing. We have been highlighting risk to the former; however, on the latter point, we thought we had seen signs of a stabilization only months ago, but demand softness has clearly renewed pricing pressure, particularly in West Texas. We find it hard to be upbeat most NAm-exposed oilfield services names into 3Q earnings season, though we question how much of this negativity is already "in the price.'" Regardless, we are lowering our rig count forecasts by ~15% from 2020-22, and our well completion forecasts by another ~10%. We are lowering EBITDA forecasts for NAm-focused service & equipment players by ~15% on average, and PTs by ~25%, as well. See a full summary of these changes here.
Featured Topic: Who's Driving Activity Declines? As completions activity and land drilling demand in particular have dropped faster than we expected YTD, we attempted to unpack the sources and drivers of these declines and what the implications will be for activity moving forward. Our analysis suggests that both public and private operators have dropped a roughly equal percentage of rigs this year, but the majority of rig releases by public E&Ps occurred more recently, while private operators have decreased rig counts more gradually throughout 2019 — we attribute this discrepancy to different activity drivers between the two groups.
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This is why I keep telling all who will listen that U.S. oil production will decline into year-end.
October 7, 2019
North America oilfield activity has continued to surprise to the downside as producers trimmed activity throughout the summer. We are lowering our macro deck once again; however, we see US E&P capex budgets only down in the mid-single digits in 2020 — better than many fear.
North America (NAm) activity continues to fade into year-end — lowering our macro deck again. While 2Q earnings calls provided somewhat of a preview of what was to come (see our 2Q EPS review here), NAm activity continues to disappoint, driving service demand and pricing declines across the spectrum. While pressure pumping pricing has faded modestly, we are hearing of larger steps down in land rig and frac sand pricing. We have been highlighting risk to the former; however, on the latter point, we thought we had seen signs of a stabilization only months ago, but demand softness has clearly renewed pricing pressure, particularly in West Texas. We find it hard to be upbeat most NAm-exposed oilfield services names into 3Q earnings season, though we question how much of this negativity is already "in the price.'" Regardless, we are lowering our rig count forecasts by ~15% from 2020-22, and our well completion forecasts by another ~10%. We are lowering EBITDA forecasts for NAm-focused service & equipment players by ~15% on average, and PTs by ~25%, as well. See a full summary of these changes here.
Featured Topic: Who's Driving Activity Declines? As completions activity and land drilling demand in particular have dropped faster than we expected YTD, we attempted to unpack the sources and drivers of these declines and what the implications will be for activity moving forward. Our analysis suggests that both public and private operators have dropped a roughly equal percentage of rigs this year, but the majority of rig releases by public E&Ps occurred more recently, while private operators have decreased rig counts more gradually throughout 2019 — we attribute this discrepancy to different activity drivers between the two groups.
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This is why I keep telling all who will listen that U.S. oil production will decline into year-end.