After Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) reported earnings in late July, the financial media published innumerable articles screaming that the oil-field services giants had called a bottom for the recent down-cycle.
The headlines contain a kernel of truth. Halliburton’s management team indicated that the second quarter would mark the trough for some of its core businesses in the North American onshore market—namely pressure pumping and other service and product line related to hydraulic fracturing.
Schlumberger’s management team was less sanguine about the prospects for the North American market, but indicated that the company should be able to claw back some pricing concessions and improve profitability by bundling service offerings and introducing higher-margin technologies.
We agree with Halliburton and Schlumberger’s assessment. However, calling the cycle’s bottom misses the point. At this juncture, investors should be more concerned about the likely speed and slope of the recovery after the trough.
Many oil-field service stocks—especially Helmerich & Payne (NYSE: HP) and other onshore contract drillers—have priced in a rapid rebound in profit margins and earnings. However, the recovery more than likely will prove to be W- or bathtub-shaped instead of V-shaped.
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Elliott and Roger on Dec. 30, 2021
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