Things haven't been going well for oil service companies recently. Many, especially those with a North American focus, saw their stock prices roughly halved since a peak in 2011. Profits also collapsed when demand for drilling rigs tumbled while competitive pricing pressures increased. But there are signs that the worst could be over. With the possibility of better times, investors might want to start looking for some oil service stock bargains.
Signs the oil service industry could be turning
There is evidence that oil service fundamentals may be improving. In their latest quarterly reports, some firms hinted at three trends that could provide for a better future. First, there are indications of stabilization in onshore rig demand. The number of land-based rigs in North America has fallen since 2011 but rising day rates, or the daily payment a drilling rig earns, suggests the decline may be moderating. Evidence of increased Gulf of Mexico offshore drilling and additional opportunities internationally also hint at a healthier operating environment. Gulf activity ground to a halt after the massive oil spill in 2010 but firms operating in that region should prosper as business rebounds. Foreign demand for horizontal drilling and fracking services, used to extract tough-to-reach reserves, will likely support additional industry growth.
Not all the news is good, however. Tough conditions remain for North American onshore ancillary service providers. Those that concentrate on U.S. land-based support services like well maintenance, equipment handling, and tool rental will find it hard to achieve higher profits thanks to stifling competition and continued pricing pressures.
Some service companies will outperform
Given the variable nature of industry improvement, investors might want to pick and choose among the differing oil service companies. Three that might stand out are:
Patterson-UTI Energy (NASDAQ: PTEN ) owns more than 300 marketable land-based drilling rigs and provides onshore services in North America. Its latest quarterly report shows a difficult operating environment. Revenues fell 3% and net income caved a steep 56%, compared to 2012. Its average number of rigs in use dropped 18% versus the same period a year ago.
But Patterson-UTI also reported some hopeful omens. The company's quarterly average day rate came in at $23,120, a 2.4% rise from 2012 and a sign of better rig demand. The improved order environment was confirmed when the company noted that they are now able to recontract drilling rigs, whose contracts were terminated early, quickly thanks to increased interest.
Nabors Industries (NYSE: NBR ) operates approximately 472 land drilling rigs internationally and roughly 544 rigs in North America. The company also markets an offshore fleet worldwide. Like others in the industry, its recent quarter came in weak. Sales were down about 6% and adjusted income from operating activities slid around 60% from 2012 levels. Improvements in the company's international and U.S. offshore drilling business were more than offset by lower average day rates and decreases in drilling activity in North America.
Nabors could benefit greatly from improving fundamentals, however. Its international operations are a main avenue for growth. A tighter supply of suitable rigs in some foreign markets has led to improving overseas rates and increased profitability. New demand from shale-based projects in Argentina, long-term ventures in Northern Iraq and Kazakhstan, and increased drilling activity in the Gulf of Mexico are some of company's most promising opportunities.
Though the company sees limited near-term upside in its North American land-based business. Nabors' Chairman and CEO Tony Petrello declared, "We expect this quarter to represent the low point in our results, and we anticipate a progressively upward trend over both the near and longer term."
Superior Energy Services (NYSE: SPN ) is an agile industry player. The company is significantly reliant on its North American business but has handled the downturn well with an adroit focus on building their Gulf of Mexico and international operations. Superior recently posted a weak quarter with revenues down 6% and a 52% crash in net income compared to 2012.
As bad as the results seem, there are some encouraging signs. Though Superior's U.S. sales dropped around 10% in the quarter, the company was able to slightly increase profit margins, thanks to a fixation on making money rather than growing market share. Increased business in the Gulf of Mexico was another plus. Gulf-based revenues increased 34% for the first six months of 2013 compared to a year earlier. International success was also notable with 2013 first half revenues increasing 13% due to growth in Brazil, Colombia, and Argentina.
There are signs things might be turning around for the oil service industry. Companies with greater exposure to rig ownership, international markets, and operations in the Gulf of Mexico may be the best positioned for any upturn. Investors might want to pick among those relatively inexpensive firms now, so they can cash in when the sector's fortunes do improve.
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