Has the Oil Market Finally Bottomed?

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Ever since oil prices started tumbling in late 2014, oil executives, analysts, and investors have been wondering when the market will finally hit rock bottom. While there have been many guesses over the past two years, the data is starting to suggest that the market could have bottomed out during the second quarter. At least that is the view of oil-field services giant Schlumberger (SLB -2.14%).

On the final approach

At a recent industry conference, Patrick Schorn, Schlumberger's president of 0perations, detailed what the company is seeing in the oil market. He started off by noting that market conditions during the second quarter were as bad as it expected. The company is still projecting revenue declines across most of its product groups, with revenue characterization revenue, for example, expected to slump 10% from last quarter while drilling revenue is projected to fall 20%.

What has changed is visibility, which is improving. North America, in particular, is expected to add rigs for at least the next two quarters based on what its customers are saying. Meanwhile, opportunities for Schlumberger's product management services are growing, with it being the company's only segment growing at the moment. The company sees that segment's expansion continuing, especially in North America.

Given what Schlumberger is seeing, Schorn said that the company "increasingly believes" that the second quarter "may represent the final approach to a market bottom."

What that means for the oil market

Schlumberger is not the only oil-field service company that believes the oil market downturn will bottom out in the second quarter. Core Labs (CLB), for example, noted in its first-quarter report that its second-quarter results "should mark the bottom." Meanwhile, Halliburton (HAL 1.11%) CFO Mark McCollum used the word several times in a speech at a recent conference to describe where the company believes the industry is in the cycle. In particular, he noted: "We think at this point in time in the cycle the market itself will be – we're coming off of the bottom and we feel like we have kind of at the bottom at least in North American and approaching a bottom internationally."  

That said, while there is growing consensus that the oil market is at or nearing a bottom, market participants do not have a consensus view on the market's next move. Schlumberger, for example, has a very conservative view, with it seeing challenges ahead in 2016. Not only is it concerned that many drillers do not have the cash to ramp up drilling activities quickly, but there is a big overhang of drilled uncompleted wells. Furthermore, it sees continued service pricing pressure because of significant excess equipment. This leads Schlumberger to believe that its earnings will not start rebounding until 2017.

Core Labs, on the other hand, said that it is anticipating "a 'V-shaped' worldwide commodity recovery that should lead to increased crude oil prices followed by increased industry activity levels worldwide." Given that view, it sees its earnings and margins starting to recover in the third quarter. Driving this outlook is Core Labs' assessment that "continuing decline in global production and the continuing increase in global energy consumption should create a tight crude oil supply market for the second half of 2016, which should lead first to increased crude prices and then to higher industry activity levels worldwide."

Initially, a recovery in the second half of 2016 had also been the view of Halliburton. However, it has moderated its outlook over the past few months with McCollum noting that "the recovery itself is going to be a lower slope recovery than maybe some others have been." Furthermore, the Halliburton CFO believes that the "recovery itself may be somewhat choppy." However, he does believe that North America will "clearly [be] the first mover" in this recovery, which does play into its strength given its focus on that market.

Investor takeaway

There are clear signs that the oil market is making its final approach to the bottom, if not already landed there. This view suggests that oil industry earnings should bottom as well. What is not clear at the moment is when nor how quickly the sector will start to recover. While Core Labs remains convinced there will be a "V-shaped" recovery, most of its larger peers do not expect conditions to improve meaningfully until next year. This uncertainty suggests that there could be more volatility on the horizon as the sector begins its long road to recovery.