Even for patient energy investors, it would seem that oilfield service (OFS) stocks are getting a raw deal. The group has closely tracked this year’s downward movement in oil prices, deviating significantly from the continued upward trajectory in the US oil rig count. Yet, some analysts argue that OFS stocks may see further weakness as their E&P customers reduce production plans in response to lower crude prices.
Take Halliburton (HAL) for example, which reported 2Q results on Monday (7/24/17). The stock, already down 18% in 2017, fell an additional 4.2% despite handily beating Street expectations and despite the WTI oil price rising 1.2% on the day. What spooked HAL’s stock appeared to be management’s comments that, with the recent decline in oil prices, “customers are tapping the breaks.” Ironically, the fear that US producers (OFS customers) would oversupply the market by NOT tapping the breaks is largely responsible for this year’s oil price decline and the resulting negative performance of OFS stocks.
So, which one is it? Should OFS investors hope for increased customer activity that spurs the groups’ revenues or lower customer production that spurs the oil price? And hasn’t the group already paid the price of concerns of reduced service levels? Should the stocks really be hit again?
While the day-to-day stock price action can be frustrating (especially when a sector is out of favor), we would offer a few points of perspective:
- Stock price changes around earnings (or other events) often are more reflective of hedge fund positioning, short-term sentiment, and trader conference call reactions than the longer-term fundamental outlook for a company or sector. This short-term focus seems to have even been accentuated in recent years, often resulting in price movements opposite to initial reactions or even logical thinking.
- Oilfield service stock prices, as well as E&Ps, have traditionally had a high correlation to oil prices. Whether those correlations will be diminished in a shale era of potentially range-bound oil prices is topic of debate. Regardless, with the group’s underperformance going largely hand-in-hand with this year’s negative change in oil prices, it would seem that any industry actions that support prices (e.g., producers “tapping the breaks” or OPEC decisions) would ultimately be a positive for OFS stock prices.
- OFS stock prices tend to be leading indicators to service levels, not visa-versa. As shown in the following chart, the Vaneck Vectors Oil Services ETF (OIH) has historically led changes in the US oil rig count. OIH dropped sharply concurrent with the fallout in oil prices in mid-2014, several months ahead of the resulting rig count decline. Then, OIH bottomed in January 2016, four months before the upturn in the US oil rig count. Finally, OIH began its latest decline in late January 2017, while the rig count just now appears to reaching a plateau. Beyond the short-term market reactions to events like earnings, we believe the OFS group will continue to track forward expectations for customer service levels, which are generally formed prior to the actual production plan announcements by E&P customers.