For the most part, last year was a down one for oil stocks, with most slumping. Continued oil price volatility was the main culprit. While crude prices started in the low-$50s, they quickly tumbled back in the $40s, causing many drillers to hit the brakes on spending by midyear. Oil prices, however, would come roaring back from that swoon and ended the year above $60 a barrel, though that didn't seem to get oil stocks out of their rut.
With crude continuing to improve in 2018, optimism is rising the oil industry hasn't seen in quite some time. That's evident from what oil-services giants Halliburton (HAL 2.99%) and Schlumberger (SLB 3.26%) said on their most recent conference calls, with both seeing big things ahead for the industry and their companies. In short, 2018 looks as if it could be a promising one for oil stocks.
Finally making the upward turn
Halliburton recently reported its fourth-quarter results, which were very good after adjusting for some one-time charges. However, as good as the quarter was, Halliburton CEO Jeff Miller believes it's only the beginning of what's to come. He made that clear on the accompanying conference call. Although "2017 was a dynamic year for the oil and gas sector that marked another step on the road to recovery for our industry ... I am very excited about the way 2018 is shaping up," he said. "Commodity prices have moved up, North America unconventional activity should be very busy; international markets are starting to show signs of life."
While he noted that shale drilling in North America would remain active, what stood out was his view on activity in other areas of the globe. Miller said he was "encouraged for the first time in three years" because "green shoots are appearing" in the form of more service requests and customers' tones have changed. His company expects international industry activity levels to gradually improve throughout the year.
Schlumberger was also optimistic about what it sees outside the fast-growing North American shale market, with expectations for its international operations to "return to growth for the first time since 2014," according to Patrick Schorn, the executive vice president for new ventures. That would enable Schlumberger to start putting some of its idle equipment back to work.
A gusher of profits awaits
This uptick in market activity levels leads both companies to believe that the volume of services they provide customers will rise this year, as will pricing. That one-two punch should drive up margin and propel profitability. In fact, Halliburton's CEO has no doubts that margin will return to a more normalized level this year. That puts the company in the position to generate significantly more cash flow.
Meanwhile, for Schlumberger, the expected improvement in the international market is particularly noteworthy given the impact it will have on the company's profitability. CEO Paal Kibsgaard noted on the fourth-quarter call:
The return to broad-based growth in international markets represents a significant boost to our earnings power due to our unrivaled leadership position in all parts of this market in terms of both market share and profitability. The significance of it is best illustrated by the fact that we generate four to five times higher earnings for each incremental customer that was spent in the international market compared to the incremental customer dollars spent in North America. So after three very tough years, it is now clear that the tide is clearly turning in favor of Schlumberger.
While it will take a couple of quarters before that uptick flows to the bottom line, Schlumberger expects to generate substantial cash flow this year and plans to return a portion of that excess cash to investors by repurchasing more of its stock.
Higher profits = higher stock prices?
This year is shaping up a good one for the oil industry. As long as oil prices hold up, producers should generate higher cash flows, giving them more money to spend on oilfield services, which should flow down to the bottom lines of companies like Halliburton and Schlumberger. That industrywide improvement in profitability could help drive oil stocks higher, potentially making 2018 a terrific year for investors.