A Crude Awakening for Oilfield Services

If earnings reports offer a window into the gears of an economy, and industrial companies are the crucial cogs that keep the gears turning, then I'm sorry to report that the U.S. economy is like a broken machine in need of prolonged and expert repair.

Lead-off earnings reports from industrials are corroborating available data, telling much the same story: The U.S. industrial base is seriously impaired and growing weaker. We're all too familiar with the woes of once-mighty automakers like General Motors (NYSE: GM  ) . But now, more than one year after the epic Bear Stearns collapse, I'm witnessing a disturbing confluence of indicators that heralds continuing downward momentum in U.S. industrial activity.

Over recent days and weeks, I've documented these sobering developments through the earnings windows of coal giant Peabody Energy (NYSE: BTU  ) , railroad operator CSX (NYSE: CSX  ) , and mining equipment maker Joy Global (Nasdaq: JOYG  ) . Peabody Energy confirmed that U.S. steel makers continue to operate below 45% of capacity, whereas rail operators are seeing massive reductions in freight volumes across every category.

Where did the energy go?
Absorbing huge excesses of productive capacity that blossomed before the financial disaster took hold, oil and gas producers are continuing to adjust to unanticipated price levels by reducing production and capital expenditures. Fellow Fool contributor Toby Shute sees the oilfield services companies now getting squeezed into lower profit margins with rig rates seeing a pricing correction of about 30%.

Lufkin Industries (Nasdaq: LUFK  ) , a small-cap oilfield services company specializing in pumping equipment, can confirm that observation. Lufkin saw its earnings from continuing operations tumble 30% amid an abrupt margin squeeze and significant deterioration of demand for its products. The company's backlog for oilfield equipment orders has been sliced in half since the end of 2008, to just $93.3 million. Incredibly, Lufkin expects the second quarter to bring even greater pain, noting that conditions in previously less-affected regional markets like California and West Texas began to erode during the first quarter.

Fools know better than to leap to broad macroeconomic conclusions on the basis of a single small-cap company's results, so I trust they will scrutinize results from larger sector components like Schlumberger (NYSE: SLB  ) and Baker Hughes (NYSE: BHI  ) as earnings season rolls on.

I believe it is clear, however, that we can include oil and gas producers and related oilfield services on the growing list of severely impaired domestic industrial sectors.

Further Foolishness:

Lufkin Industries has garnered a coveted five-star rating from the talented community of investors at Motley Fool CAPS. Join the free online investment community and cast your vote today.

Fool contributor Christopher Barker derives his energy from coffee and is doing his part to keep that industry afloat. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Peabody Energy. The Motley Fool has a disclosure policy.


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