What happened

Leading oilfield service company Schlumberger (SLB -1.17%) sees better days ahead for the oil industry. The company not only provided strong financial guidance for the year, but the company's CEO also gave a very optimistic forecast at an industry conference.

That fueled a rally in Schlumberger's stock, which surged more than 7% by 2:45 p.m. EDT on Wednesday. It also drove up shares of several other oilfield service companies, including Core Laboratories (CLB)Oceaneering International (OII -1.92%)Liberty Oilfield Services (LBRT -0.28%)TechnipFMC (FTI 0.24%), and Nextier Oilfield Solutions (NEX), which were all up by more than 10% at one point on the day. 

A person in a hardhat standing near a stack of pipelines.

Image source: Getty Images.

So what

Schlumberger provided investors with updated financial guidance. The company expects its full-year revenue for 2021 will exceed $22.5 billion, which is well ahead of the current analysts' consensus estimate. Moreover, the oilfield service giant sees its full-year adjusted EBITDAmargin between 20.8% and 21.3% and its free cash flow margin above 10%. That's an improvement in its adjusted EBITDA margin, which, for example, was 20.1% in 2020's fourth quarter and 19.4% in the third.  

CEO Olivier Le Peuch also said at an industry conference that: "With oil demand projected to reach pre-2019 levels by the end of 2022 and supply tightening, our oil and gas business is on the verge of an exceptional growth cycle. Given our unique position and strategy, we are positioned to deliver outstanding returns in the short and medium term."

While Schlumberger's global scale and large size put it in a prime position to benefit from the growth cycle it sees ahead; other service companies will also benefit from the improving market conditions. For example, an increase in onshore drilling activities in North America will directly impact companies focused on providing those services like Liberty Oilfield Solutions and Nextier Oilfield Solutions. Meanwhile, an improvement in offshore drilling positively affects companies such as Core Labs, Oceaneering International, and TechnipFMC, given their focus on that market. 

These oilfield service companies will benefit from improving market conditions in two ways. First, they'll benefit from providing a higher volume of services to customers as they drill more wells. On top of that, they should be able to raise prices. That's why Schlumberger sees strong revenue and margins in the coming year. Its peers should also see an increase in revenue and margins as they benefit from higher service volumes and improved pricing as competitive pressures fade. That should enable oilfield service companies to generate more free cash flow, which they can use to repay debt, expand their operations, or return money to shareholders via dividends and buybacks. 

Now what

Oilfield service companies are coming off a brutal 2020. Oil prices crashed because of the pandemic, which caused oil producers to pull back on spending. That hurt service volumes and pricing. 

However, with vaccines rolling out, oil demand is improving, pushing prices higher. That's starting to give oil companies the confidence to increase their spending plans, which will provide more work for oil service companies, boosting their revenue and earnings. If the cycle Schlumberger envisions comes to pass, oilfield service stocks could have much further to run as they grow their revenue, margins, and profits in the coming years.