ATB Capital ATB Capital Markets analyst Waqar Syed and Tim Monachello are bearish on U.S.-based energy services companies in the near-term, expecting “weak” second-quarter guidance from land drilling contractors and “sub-optimally positioned” pumpers.
“However, underlying the theme of weak near-term outlook is an improving medium-term outlook for the U.S., given WTI is at $85.00 per barrel, and EIA’s January 2024 oil production data is showing 762 mbbl/d month-over-month declines, meaning that oil-related D&C activity needs to increase in H2/24 and then more meaningfully in 2025,” they said. “As a result, we raise our 2025 U.S. land rig count forecast, and recommend buying quality U.S. companies on any weakness generated by a Q1/24 EBITDA miss or from below-consensus Q2/24 guide.
“Our Q1/24 EBITDA estimates are generally in-line with consensus, but we are slightly below for TCW-T, ESI-T and LBRT-N. We expect below-consensus EBITDA Q2/24e EBITDA guidance for NBR-N, HP-N and PTEN-N, as U.S. rig activity has been running below prior expectations, and further reductions in gas-related drilling are likely.”
In a research report released Monday, the analyst argued recent U.S. drilling and completion activity has been “insufficient” to maintain oil production.
“While cold weather in the Bakken, and GOM field maintenance may have contributed to the decline, the magnitude of the drop and the geographical diversity of the drop indicates that declines in D&C activity in 2023 have started to have an impact on oil production,” the analyst said. “This view is also bolstered by the March 2024 Dallas Fed Survey, where E&P oil production index turned negative for the first time since Q3/20. Although we are slightly trimming our 2024e rig count forecast, we do expect private E&Ps to start picking up some rigs in H2/24, with a more meaningful and broader activity recovery in 2025e, with rig count forecast to grow by 10 per cent year-over-year. Therefore, we recommend buying US leveraged names on any weakness during the earnings season.”
Believing Precision Drilling Corp. has “performed very well,” Mr. Syed thinks his estimates are safe and expects the Calgary-based company to “guide to an improving U.S. market in Q2.” He raised his target for its shares by $1 to $126, keeping an “outperform” recommendation. The average target on the Street is $125.99, according to LSEG data.
“In Canada, we believe that PD-T is best positioned for the earnings season,” he said. “Although the stock has been one of the best performing stocks year-to-date, we do see further upside through the course of the year. The Canadian high-spec drilling rig market remains the strongest asset class in North America and PD-T is the largest owner of this asset class. We believe that although the U.S. drilling market should see weak activity in Q2/24, PD-T’s U.S. rig activity should see q/q improvement as its Rockies based rigs typically see a seasonal rebound in Q2. We believe that the Company’s Q2/24 and 2024 consensus estimates are safe as well, and while seasonally Q1/24 FCF may not be positive, the Company is on track to generate solid FCF in 2024 and pay down $200-million in debt. The stock is trading at 4.4 times 2024 estimates and 3.4 times 2025 EBITDA and is trading at FCF yield of 18 per cent for 2024 and 19 per cent for 2025. "