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Investing Topics: Pressure Pumping

Surveying the Oil-Field Services Landscape

The tale of two cycles looks set to continue for another year. Drilling activity may have bottomed in the international markets, but pricing pressure will persist until price deflation improves break-evens and upstream operators have more confidence in the outlook for oil prices. Meanwhile, some US exploration and production companies may moderate their spending increases relative to last year, but this short-cycle market remains the best bet for incremental growth and pricing gains in 2018–especially if our call for oil prices to average between $55 and $60 per barrel pans out. Given our preference for US exposure at this point in the cycle, we review the challenges, opportunities and market dynamics in three prominent onshore service lines through the lens of companies’ third-quarter results: contract drilling, pressure pumping and proppant.

Focus On The Permania

The latest additions to the Energy & Income Advisor Focus List have lagged of late, primarily because of the selloff in West Texas Intermediate crude oil. In light of these recent market moves, we we revisit our outlook and investment strategy.

Beyond The Big Four

The bullish case for US oil-field services hinges on accelerating drilling and completion activity helping to relieve the capacity overhang built up during the boom years, potentially setting the stage for a recovery in pricing.

Industry survivors with superior scale and balance sheets have an opportunity to take market share from smaller operators. Oil-field service companies have also slashed costs aggressively, providing earnings leverage to a recovery in volumes.

At the same time, investors must remember that many of these companies operate cyclical businesses and consider the extent to which current valuations have priced in any incremental upside in earnings.

North American Oil-Field Services: Near-Term and Longer-Term Outlook

Activity levels and pricing for oil-field services and equipment will likely remain under pressure in the US onshore market this year, with early 2017 bringing a bit of a recovery on both scores. But a return to the levels witnessed during the boom years appears unlikely, especially if Saudi Arabia opts to tap some of its spare capacity to take market share and keep oil prices in check.

IPO Analysis: Mammoth Energy Partners LP (NSDQ: TUSK)

Unlike most master limited partnerships, Mammoth Energy Partners LP will pay a quarterly distribution that varies based on the cash flow generated by the smattering of oil-field services businesses arrayed under its banner. In other words, investors seeking a reliable quarterly distribution should look elsewhere.

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