Shares of oilfield services providers Schlumberger (SLB 0.67%), Core Laboratories (CLB), and National Energy Services Reunited (NESR 3.16%) were plunging today, down 9.3%, 7.3%, and 9.6%, respectively, as of 1 p.m. ET.
Schlumberger reported its first-quarter results on Friday, but that wasn't the reason for its decline today, as its results were largely positive. Rather, macroeconomic issues overwhelmed company-specific news.
The price of oil plunged about 6% on Monday as of this writing, hurting all oil-related stocks. The culprit, as has been the case in so many areas, was the spread of COVID-19 in China, which has prompted strict lockdowns and fears over more cities implementing the measures taken already in Shanghai. Chinese lockdowns could lead to a decrease in oil demand, so prices fell hard today, below $100 per barrel.
While Shanghai has been locked down for a few weeks, outbreaks in the capital city of Beijing prompted fears the Chinese government would lock down that large city as well. With outbreaks spreading to Beijing, the city has begun shutting down certain business districts, and some fear the entire city could be locked down as was the case in Shanghai. With China's massive population, that could be a big hit to oil demand on international markets.
Lower demand could lead to lower prices than expected, which means oil and gas companies wouldn't spend as much on exploration and other services provided by these three names.
Last week, Schlumberger, the largest oilfield services company in the world, reported earnings, beating on both revenue and earnings per share and raising its dividend to investors by 40%. The current dividend now yields 1.68%. So, the oil patch was coming into this week riding a high, as Schlumberger was near 52-week highs, setting it up for today's decline.
That being said, its stock is still below levels seen in 2019. That's because while oil prices have risen, that has in large part been due to oil companies limiting their investment in supply. Oil producers have fared much better over the past year than services companies, which depend on industry spending for revenue and cash flow, not just the price of oil.
That could be why Core Laboratories received a sell recommendation from analysts at Piper Sandler last week. Last month, Core Labs also reported disruptions to its operations due to COVID-19 outbreaks among its staff, as well as disruptions to its clients' operations in Europe and Russia amid the war there. These disruptions will act as a headwind to initial guidance given in early February when the company reports on Wednesday.
National Energy Services Reunited is focused on the Middle East, Africa, and Asia, so it may be off the radar for investors. There wasn't any material news out of the company today, although management did announce a new three-year $300 million conventional fracturing contract with Saudi Aramco last week. As a small-cap company with just a $600 million market cap, that can move the needle. Still, it's not doing much for the stock, as the news over possible demand destruction in China is overriding company-specific factors.
All three of these stocks tend to rise rise or fall with the price of oil, but these stocks may have less upside than the producers that are directly affected by the price of the commodity. That's because the industry has consolidated over the past decade, and coming out of the pandemic, has been much more disciplined than during the "drill, baby, drill" days of the 2010s.
Even if oil prices remain high, the industry is unlikely to see a huge spending binge on exploration. That's unless the price of oil spikes even further toward $200. Today, however, it looks as though oil is dipping to around $90 amid Chinese demand destruction fears.
I'm not a huge fan of the services companies to begin with, as I'd rather invest in the explorers for oil exposure. Their newfound discipline and shareholder-friendly new dividend policies make them better investments in my eyes.