Barclays | The OFS Playbook
30 September 2019 8
Large Cap Oilfield Servicers
Themes in the Sector
E&P capital discipline is real. Our North American E&P Survey shows
spending will be down 2% this year, revised down from the January survey of
9% growth. Although no guidance for 2020 has been given yet, early
indications are that overall budgets will be flat to down 5% in 2020.
A Multi-Year Middle East spending cycle is inflecting. The Saudi rig count is
currently 180-190 rigs (the 90 rigs in the BHGE int’l rig count has long been
understated), up roughly 30 rigs over the past 3 years, most drilling for natural
gas. Sources indicate the rig count could surpass 300 rigs in 3-4 years with
Aramco confident it has cracked the code on shale development in the Jufurah
basin, which has been said to be geologically similar to the Eagle Ford.
Could FCF and returns surprise without significant pricing? Int’l pricing
trends have steadily worked lower over the past 5 years, though encouraged
by increasing utilization. In major contrast to prior cycles, there is very little
need for growth capex suggesting improved FCF and returns even without
pricing improvements.
Combing through business to see what makes sense. A theme from our
conference a few weeks ago was OFS companies taking a good, hard look at
portfolios. We expect it to be a busy next few months with spins, divestitures,
and consolidation likely on the horizon.
Stocks
Tenaris (TS, Top Pick, OW, 55% Upside). Five-Tool Player. Largest global
supplier of OCTG; growing share in US land with higher pricing; offshore
optionality; organic growth in Argentina; ME/Russia expansion; pristine
balance sheet.
Schlumberger (SLB, OW, 46% Upside). Unveiled new strategy and set lofty but
achievable goals for NAM and Int’l. Current priorities are making decisions on
the NAM businesses and addressing uneconomic int’l LSTK contracts.
Baker Hughes (BHGE, Top Pick, OW, 29% Upside). Longer-cycle businesses
beginning to take hold and stronger visibility than peers, some of the GE
ownership overhang was removed (GE still owns ~38.5%).
Halliburton (HAL, EW, 23% Upside). New NAM playbook is positive, but
negative outlook for NAM is problematic. Will be beneficiary if OFS capex
remains depressed (tightening pressure pumping market).
TechnipFMC (FTI, EW, 20% Upside). Announced spinoff of onshore/offshore,
but investors are waiting on details. Could be one of the biggest beneficiaries of
an offshore recovery; has been awarded more iEPCI contracts than any other
company.
National Oilwell Varco (NOV, EW, 13% Upside). Orders could be under
pressure with reduced E&P NAM spending outlook, the counterargument is
that OFS can’t cut spending forever. Int’l and offshore seem to be gaining
steam.
Baker Hughes BHGE OW $31 $24.04 29% $24,679 25% 52% 23% 9.3x 7.5x 18% 57% 2.8 4.1 4% 7% 4% 7% 3%
Halliburton HAL EW 23 18.73 23% 16,406 55% 31% 14% 6.8x 6.7x -75% 6% 7.5 7.7 4% 4% 6% 6% 4%
Tenaris TS OW 33 21.33 55% 12,590 45% 35% 20% 8.2x 6.9x -21% 47% 6.0 7.6 14% 11% 8% 7% 2%
Schlumberger SLB OW 50 34.33 46% 47,479 27% 53% 20% 9.6x 8.7x NA 49% 5.8 7.2 8% 9% 6% 6% 6%
NOV NOV EW 25 22.04 13% 8,505 45% 35% 20% 12.9x 9.7x NA 30% 1.1 3.8 2% 3% 2% 4% 1%
TechnipFMC FTI EW 29 24.18 20% 10,796 47% 9% 44% 5.8x 6.4x 17% NA 8.5 7.2 -2% 3% -2% 5% 2%
Average