The energy sector has enjoyed bumper profits in the current year, with Big Oil companies setting records right, left and center. ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and Shell (NYSE: SHEL) together brought in $46 billion in earnings in the second quarter, with all three setting new records for quarterly earnings. Overall, high commodity prices have been largely to thank for the fat earnings by oil and gas companies.
And now energy experts are saying the party is set to continue in 2023, only that it won’t be nearly as wild. In a recent Moody's research report, analysts say they have changed their outlook for the Global Energy sector to stable from positive.
According to the report, industry earnings will stabilize overall in 2023, but remain below levels reached by recent peaks. The analysts note that commodity prices have declined from very high levels earlier in 2022, but have predicted that prices are likely to remain cyclically strong through 2023. This, combined with modest growth in volumes, will support strong cash flow generation for oil and gas producers.
Moody’s estimates that the U.S. energy sector’s EBITDA for 2022 will clock in at $$623B but fall to $585B in 2023. The analysts say that low capex, rising uncertainty about the expansion of future supplies and high geopolitical risk premium will, however, continue to support cyclically high oil prices. Meanwhile, strong export demand for U.S. LNG will continue supporting high natural gas prices.
Bullish On OFS
One particular standout from that report is how bullish the analysts are about the Oil Field Services (OFS) sector.
“Rising demand for oilfield services (OFS) amid some growth in drilling and completion activity will continue to boost pricing power and will support material growth in earnings for OFS companies,” the analysts wrote.
While discipline will still be the name of the game with regard to capacity, Moodys says pricing power will continue to strengthen next year, “allowing OFS companies to expand profit margins, even with labor and materials cost inflation”.
Moodys also expects improved profit margins for OFS from increasing day rates for onshore and offshore rigs, as well as higher future rates as customers renew contracts.
U.S. rigs are up by some 30% since January, and recovering to around 95% of their January 2020 levels, according to the report.
OFS companies have been reporting that drilling and well completions activity as well as pricing have been edging higher, while roughnecks are also saying they are seeing an increase in job offers. Oilfield workers were some of the hardest hit demographic by the Covid-19 pandemic in 2020. Nationally, the oil and gas industry is estimated to have lost 107,000 jobs as per global consulting firm Deloitte, with an estimated 200,000 roughnecks losing their jobs at the height of the global lockdowns.
Here are some OFS stocks to keep on your radar.
Market Cap: $25.1B
YTD Returns: 15.8%
One of the largest oil field services companies, Texas-based Halliburton Company (NYSE: HAL) provides products and services to the energy industry worldwide including well completion drilling and evaluation services.
Halliburton provides diverse production solutions in exploration, drilling, production software and data management services to upstream oil companies through its Landmark Software and Services product line. Further, the company’s Testing & Subsea and Project Management product line specializes in reservoir optimization and associated technologies. Thailand’s PTT Exploration and Production and Kuwait Oil Company are among the notable oil and gas companies that awarded Halliburton contracts to implement digital transformation and enhance efficiency and production at their oilfields.
Halliburton is among the international OFS companies that have been caught in the Russian-Ukraine crossfire. Back in April, Halliburton announced that it had immediately suspended future business in Russia and is winding down remaining operations there. Previously, the company had halted all shipments of specific sanctioned parts and products to Russia, though the company says it has no active joint ventures in the country.
Fortunately, HAL is not as heavily exposed to the Russian market, with JPMorgan estimating that it gets only 2% of its revenue from the country.
HAL has an average analyst recommendation of Strong Buy with a $31.84 price target, good for 15% upside.
Market Cap: $6.5B
YTD Returns: 16.3%
Texas-based NOV Inc. (NYSE: NOV) is a leading worldwide provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. NOV was formerly known as National Oilwell Varco.
Wall Street has been souring on NOV lately, thanks to valuation and supply chain concerns.
Bank of America has issued a double downgrade for NOV shares to Underperform from Buy with a $22 price target (31.2% upside).
"Russia is only going to create a tighter global supply chain that could delay the margin recovery story that was core to our bull thesis. We are not 100% confident that Russia developments don't make sourcing materials like aluminum, copper, nickel and steel more problematic for a company that was already struggling with its supply chain and material cost inflation," BofA's Chase Mulvehill has written.
Meanwhile, Gruber has upgraded Nabors (NYSE: NBR) to hold, as global exposure and rig rate improvement killed its free cash flow bear thesis.
Precision Drilling Corp.
Market Cap: $837.2M
YTD Returns: 61.6%
Precision Drilling Corporation (NYSE: PDS) is a Canada-based company, which is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada, the United States and certain international locations.
BMO Capital Markets has dished out upgrades to a number of Canadian oilfield services companies including Precision Drilling Corporation, CES Energy Solutions Corp. (OTCPK: CESDEF), Pason Systems Inc. (OTCPK: PSYTF), and Secure Energy Services Inc. (OTCPK: SECYF) as drilling activity ramps up.
“We believe the sector is on the verge of a multi-year run in activity levels, while pricing continues to trend higher,” John Gibson, an analyst with BMO Capital Markets, has written in a note to clients titled “Glory Days Ahead, but Expect Volatility to Continue.”
Gibson says Precision, CES, and Pason each exhibit high market share across North America, leverage to rising activity levels and strong free cash flow generating capabilities.
By Alex Kimani for Oilprice.com
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