Oilfield service companies reported their Q3-2018 results recently and to say they disappointed the stock market would be an understatement. In the last month SLB are down 22%, WFT 52%, HAL 19% and BHGE down 21%. The real question is why? Oil is down by around 12% in the same time so obviously more to it than that.


Listening to the Q3 conference calls provided some interesting insights into the prospects for OFS companies in Q4-2018 and into 2019. We know that the stock markets are short term in nature so any negativity is picked up very quickly.


The key US market and in particular the hydraulic fracturing market really affects SLB and HAL (plus BHGE and WFT on completion equipment and artificial lift). Paal Kibsgaard of Schlumberger stated ‘it is evident that the rapid softening we have seen both in frac activity and pricing over the I would say second half of the third quarter is continuing more or less with the same pace in Q4’ ‘Whether this is Q4, Q1 or it lingers into Q2 I think is to be seen, but we will do what we can to manage the variable cost‘.


Jeff Miller and Haliburton stated ‘We didn’t see the typical growth we expect in pressure pumping activity in the third quarter. This negatively impacted pricing and the efficient use of our equipment’. Q4 brings more challenges ‘budget exhaustion and seasonal issues will predictably impact activitySo, again looking forward to 2019 ‘The rising DUC count will provide a substantial completions backlog ready to be worked down in 2019’ Haliburton were more confident of a Q1 rebound.


Lorenzo Simonelli of Baker Hughes stated that he too ‘see softness in frac-related completions activity as the North American pressure pumping market weakens into the fourth quarter’


Weatherford also sited year end challenges ‘Growth in typical year end product sales are likely to be offset by stalling activity levels in the United States where we expect some declines at the end of the year related to remaining E&P budgets and typical holiday and weather delays’. The markets are never impressed with companies being weather forecasters.


The WFT problem is simple – cash: ‘Total net free cash flow in the quarter was negative $67 million’. After promising positive cash flow in Q3, investor confidence in Mark McCollum is quickly eroding. Things then moved onto market conditions. On asset sales, WFT stated ‘Current market conditions are not conducive to us setting specific sales proceeds or timing targets for the remaining transactions’ i.e. pricing and demand for remaining assets is poor.

  

On international markets, the market leaders tried to talk up the growth but were faced with divulging the realities of a growing an offshore start up market and the costs that incurs. This is also likely to have spooked the markets as they saw pricing and costs being misaligned for the first few quarters of 2019.


Paal Kibsgaard ‘‘if you look at international markets in Q4, we expect flattish revenues’We expect in 2018 deepwater drilling activity to be up about 8% versus 2017 obviously from a low base, but I think it’s moving in the right direction and we expect this trend to continue into 2019’

Haliburton also shared that view ‘Internationally, I believe the markets are in the early stages of recovery. Modest improvement in activity continues, but competitive pressures remain’


Paal Kibsgaard of Schlumberger also spoke about the pay off time for investments moving beyond 2019 ‘Our SPM (Schlumberger Production Management) business will at least be cash flow neutral in 2018 and 2019 after which we will see a significant free cash flow tailwind as our recent project additions reached their planned production rates


Sean Meakim of JP Morgan summed up investors feelings ‘So it seems to me the key for investors here is going to be getting confidence that 4Q is in fact the bottom and I think many folks will remember the challenges the industry had to start last – this most recent year’


Jim Wicklund of Credit Suisse was a little more blunt ‘Good morning, guys. What we really like is the exact day and the hours if you can provide it, of the inflection when things are going to start getting better? And whether it would be a weekday or weekend? Jud questions were most critical I think because investors aren’t sure where margins bottom or will be when activity starts to recover or at least pricing starts to recover?’ 


So, to sum up: Q4 is a washout with no-one talking about good financial performance. Even Q1 (and maybe Q2) of 2019 are still tough. International markets will be very competitive through 2019 with startup costs also hitting home. So, even though activity will increase and DUC are at a record high level, the uncertainty over timing and what the numbers will bring have really spooked investors. Is this a buying opportunity – I think so…well sometime in Q4 anyway.