Tuesday, September 15, 2015

"Oil Field Services: Just How Far Will Oil Patch Spending Fall?" (SLB; HAL OIH)

We've mentioned a few times that once we're again comfortable going long, our preference is for the service companies over the integrateds, especially considering that tight wells can be fracked and refracked two, three and four times over their productive lives.
OIH is the Market Vectors Oil Services ETF.
The OIH's 43.32% decline over the last year falls squarely in between the XLE at down 33.32% and the XOP at down 52.90%.

WTI $44.87 up 87 cents.

Lifted in toto from Barron's Stocks to Watch:
The New England Patriots aren’t the only ones suffering from “deflategate.” The one hitting the oil patch has nothing to do with deflated footballs or Tom Brady., 
In a note published today, Citibank analyst Scott Gruber reiterated his cautious stance on the oil services group as it “digests the likelihood of domestic E&P spending declining 15% to 20% next year, driving activity lower and maintaining pressure on rates.” 
Gruber now sees a better than 30% drop In the average cost of a U.S. shale well in 2015 and another 5% to 10% drop in 2016 compared to thE forecast he made in March of a 20% to 25% drop in 2015 and another 2% to 3% decline next year. As Gruber writes: 
The majority of the drop in shale well costs this year is attributable to deflation in service rates and product prices. Certainly the portion attributable to efficiency gains should stick; however, even a portion of the rate deflation may stick (or at least linger for a while). Our basin modeling points to recovery to only ~1100 rigs in 2018, despite an underlying assumption for robust U.S. production growth. This level of activity appears sufficient to only drive modest reflation in service rates. For example, pumping rates should ascend to the level where the marginal pumper can properly maintain their equipment, but not to the newbuild threshold. Thus the average shale well cost may rise ~15% in 2017/18 as activity ramps (assuming zero efficiency gains). Yet this would still leave shale well costs about 25% lower than the 2H 2014 level. 
The result? Citibank’s Gruber sees a need for “material negative revisions” across the universe of mid- and small-cap oil services stocks he covers, a list that includes Aspen Aerogels (ASPN), C&J Energy (CJES), Nabors Industries (NBR), Patterson UTI (PTEN), RPC (RES) and Superior Energy Services (SPN). 
Gruber recommends taking advantage of negative sentiment to by “premiere franchises,” namely Schulmberger (SLB) and Halliburton (HAL).
Previously:
The RE-fracking Boom and the Second-best Correction Of the Day (HAL; SLB; BHI; WFT)
Oil: It's Cheaper to Refrack (SLB; HAL; WFT)
Of Schlumberger, Asian Tigers and $10 Oil (SLB; HAL)
Re-fracking: "Drillers Take Second Crack at Fracking Old Wells to Cut Cost" (HAL; SLB; WFT)