Energy prices have skyrocketed, with the benchmark grade of West Texas Intermediate crude oil reaching a record high of $113.99 per barrel on Apr. 15. Where does that leave the big firms that keep things running in the world's oil fields?
Analysts are calling the first quarter of 2008 a transitional period during which oil and natural gas producers—the oil-services companies' main customers—paused to consider how well demand for energy could be expected to hold up in the face of mounting economic troubles, including rising unemployment, higher energy and commodity prices, and the worst consumer confidence readings in 25 years.
The bellwether of the oil-field service industry is Schlumberger (SLB), which some analysts think may report earnings below Wall Street's consensus estimate of $1.12 per share on Apr. 18. Schlumberger may come up short because of a shift in seismic data sales at its WesternGeco division from the first quarter into the second quarter, and from costs for project startups, says Mark Urness, who heads energy research at Calyon Securities.
"When the largest company starts earnings season with a sloppy quarter, it generally doesn't bode well for the whole group," he says. Still, he predicts producers will be more upbeat about business in North America based on the strength of natural gas prices and the working down of U.S. natural gas inventories. "That's going to help, but I'm not sure it's going to totally offset the sloppiness in Schlumberger's earnings and some others'," says Urness. "The growth is still there, but it will have to wait until later this year and into 2009 [to accelerate]."
The bulk of the price declines in pressure-pumping services will show up in first-quarter results, and adverse weather in the North Sea and the usual slow start by some operators in the New Year also helped make the first quarter a challenging period for many service companies, says Rob Mackenzie, an analyst at Friedman Billings Ramsey Group (FBR).
Despite that, Mackenzie says he expects to hear top executives provide a bright outlook for the rest of 2008 on companies' conference calls, which will likely encourage investors and boost stock prices.
Lowered Estimates
Citigroup Equity Research on Apr. 11 lowered its first-quarter earnings estimates for the five largest service companies—Schlumberger, Halliburton (HAL), Weatherford International (WFT), Baker Hughes (BHI), and Smith International (SII)—citing weaker than expected North Sea and Russian activity and temporary issues in Mexico.
Weather issues in the North Sea and a prolonged cleanup in Mexico after heavy rains in the prior quarter are likely to damp Halliburton's March results, while its North American revenue was probably stable despite a lower U.S. rig count, said Citi analyst Geoff Kieburtz. He added that the company should be able to recoup lost operating income in the North Sea and Mexico as the year progresses.
Weatherford's earnings will be marred by small delays in Latin America and by the exit of some rigs from the North Sea, but its lower exposure to U.S. pressure pumping will make its North America results better than its peers'. The company will also take a one-time charge of $40 million to $55 million in the March quarter for exit costs and project write-offs related to its withdrawal from countries subject to U.S. sanctions such as Iran and Sudan.
Weakness in the North Sea and Russia will keep Baker Hughes from benefiting from the seasonal strength it usually gets from its business in Europe, Africa, and the former Soviet Union.