May 18, 2022
Oil & Gas Services: 1Q22 Review Key themes through the reporting cycle
Our view: First quarter results were stronger than expected for over half of our coverage universe, with 10 of 17 companies reporting EBITDA beats. Cost inflation remains a key theme throughout the oilfield, though aggregate y/y margin expansion of 337bps suggests the services sector is gaining traction on passing along input cost increases. We believe tight utilization for both drilling rigs and pressure pumping spreads in North America should facilitate incremental margin expansion for the sector. We maintain our stock selection with SLB, HP, SES, and PSI as our preferred names.
Slightly over half of stocks beat Street estimates. Out of 17 stocks in our coverage group, 10 reported EBITDA beats, 9 managed to beat and see raised 2Q22 estimates, 5 of which also outperformed the OIH over 3 days after reporting (HP, LBRT, STEP, CEU, SCL). Exhibit 1 shows a summary of results, stock performance, and estimate revisions.
Cost inflation, where does the buck stop? Costs continue to increase across all oilfield categories, though the key question is whether service providers can pass along input increases. Year-over-year sector margin expansion of 337bps suggests most firms are gaining traction on offsetting inflationary factors and gaining net pricing. Continued inflation ultimately represents an opportunity for oilfield services to further expand margins as pricing discussions remain open and modest activity gains should continue to push utilization higher.
Rigonomics. Leading edge US super-spec rig rates have hit ~$26-28k per day (up approx. $5k/day q/q) as super spec utilization moves north of 75%. We see approximately 30 more US horizontal rigs returning to the field through 2H22, from current YTD average levels of 651. Average rig pricing should continue to converge toward leading edge pricing as rigs re-contract, underpinning sector margin expansion.
Frac trends: Step-up in profitability. Many US frac providers saw a step-up in profitability in 1Q22. Double-digit price increases rolled through fleets, and offset sand and weather delays. We see active utilization in the 80% range, which is effectively sold out. Some legacy diesel equipment can come off the fence, but longer lead-times and fuel cost savings from dual-fuel upgrades likely renders most legacy equipment obsolete.
Relative results
• Large caps (BKR, HAL, SLB): Results were largely in-line, with HAL providing the strongest 2Q22 guide. SLB had the strongest stock price action on its 40% dividend bump and constructive 2H22+ commentary. Outlook remains constructive for BKR through accelerated global LNG cycle, though 2022 Street estimates decreased.
• Land drilling (ESI, HP, NBR, PSI, PTEN, PD): US drilling cash margins expanded approximately $715/ day (12%) q/q. Aggregate 2Q22 guidance implies $1,070/day (16%) q/q of cash margin expansion.
• Frac services (CFW, LBRT, STEP, TCW): Mid-cycle EBITDA per fleet of US$14-18MM is in sight for US
providers. Canada providers see 2H22 pricing increases.
• Equipment/Diversified (CEU, NOV, SES, SCL): All firms under coverage exceeded Street estimates, in spite of global supply chain constraints.
Minor estimate changes for 10-Q releases. We are making minor estimate changes for 10-Q filings (see Exhibit 3 for details).
Favourite stocks. We see several attractive opportunities within our US and Canadian-listed coverage. We favour stocks with strong growth prospects, EBITDA & FCF margin outlooks, underpinned by improving balance sheets. Our favourite names include SLB, HP, SES, and PSI.