What happened

Shares of oilfield services companies Schlumberger (NYSE:SLB)Helmerich & Payne (NYSE:HP), and National Oilwell Varco (NYSE:NOV) rose between 24% and 29% in April, according to data from S&P Global Market Intelligence. Schlumberger saw its shares rise 24.7%, while shares of its fellow general services provider National Oilwell Varco jumped 28.6%. Meanwhile, shares of onshore oil rig operator Helmerich & Payne were up 26.3% for the month.

It was a reversal from the prior month, when all three stocks plummeted between 47.5% and 57.6%. So April's gains didn't do much to offset those losses: Year to date, each of the three companies has lost more than half of its value. All three are also down more than 75% over the last five years. 

Workers in hard hats stand near an onshore oil rig at sunset.

Image source: Getty Images.

So what

It's the usual story for oilfield services companies: When oil prices drop, oil producers need to cut back on spending. And one of the first places they cut is capital and operational spending. That means fewer rigs, fewer drill bits, and fewer real-time downhole coiled tubing services (which is an actual service that Schlumberger offers).

So, when Saudi Arabia and Russia started an oil price war in early March after failing to agree on production cuts, and oil prices promptly fell by 50%, one of the first-hit and hardest-hit sectors of the oil industry was services. General oilfield services providers like Schlumberger and National Oilwell Varco, which provide a wide range of equipment, logistical solutions, and other operational support to onshore and offshore producers, took a massive hit. Companies specifically serving the U.S. shale drilling industry, like onshore rig operator Helmerich & Payne, as well as frac sand providers, took an even bigger hit. 

Drilling for shale oil tends to cost more than conventional drilling, due to the extra effort required to extract hydrocarbons from shale rock. Shale producers use advanced techniques, like hydraulic fracturing ("fracking") and horizontal drilling to extract oil and gas from the stubborn shale rock formations. Shale wells also tend to be depleted more quickly than conventional wells, requiring more investment to replace depleted wells. 

Because of those higher production costs, shale drillers were hit harder than other oil and gas producers when oil prices tumbled. They began cutting their budgets, and many immediately announced sharp reductions in rig counts. For example, Hess -- the leading driller in the Bakken Shale -- cut its Bakken rig count from six rigs to just one. This situation is bad for all services providers, because shale drillers use many of the same services as conventional onshore producers, but it's especially bad for a shale rig specialist like Helmerich & Payne.

SLB Chart

Shares of Helmerich & Payne (the red line) fell further in early March and recovered less ground in late March and April than did shares of general oilfield services providers like Schlumberger and National Oilwell Varco. SLB data by YCharts.

Now what

As long as oil prices are low and budgets are tight, oilfield services stocks are going to have a tough time. Schlumberger and Helmerich & Payne have already resorted to painful dividend cuts: H&P cut its quarterly dividend, which it had increased every year for 47 straight years, by 65%, from $0.71/share to $0.25/share. Schlumberger's cut was a more extreme 75%, from $0.50/share to $0.125/share. At current share prices, that means H&P is now yielding 5.7%, while Schlumberger is yielding just 2.9%.

National Oilwell Varco already took the painful step of slashing its quarterly dividend by 90% during the last oil price slump in 2016, to $0.05/share. A further cut seems unlikely since the current yield is only 1.5%, costing the company only about $76.6 million per year, less than 10% of operating cash flow.

Ultimately, though, oilfield services companies are going to have a rough time until the oil industry recovers, which may take quite some time. Schlumberger, National Oilwell Varco, and Helmerich & Payne don't look like good places to put your money right now.