EPS of $0.36/sh was in-line with prior consensus. NAM frac beat prior expectations and 2019 capex was lowered. Recovery pushed out – The outlook was unsurprisingly less upbeat than 3Q considering oil price volatility and conservative E&P budgeting. Int’l revenue expected to post “solid, single-digit growth” in ’19 compared to prior double-digit target outlined in November. The NAM outlook remains murky.
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Recent consensus revisions have been notably bearish on ’19 capex and activity in USL. 4Q18/1Q19 will be sloppy, but we are sticking directionally with our more optimistic activity targets we laid out in our 2019 outlook. At this point, E&Ps can either 1) guide flat capex/underwhelm oil growth (cons. is +1.3MMbpd black oil in US), 2) guide capex growth/meet oil estimates, or 3) guide capex growth/exceed oil estimates. As per our US Productivity Drilldown, scenario #3 is unlikely, while #1 and #2 would be much more fundamentally positive for OFS than is captured in recent consensus commentary and market sentiment.
Very little to be excited about heading into a sloppy 4Q18 OFS print, but PUMP presents tactical intrigue. Our sense is that consensus buying of frac will, given oil stability, occur toward the end of 1Q19, when the decks have been cleared of USL pessimism and activity will ramp ahead of pipeline capacity. In our PUMP catch up and through the field-level grapevine, confidence on part of PUMP seems warranted into earnings. We see a tactical buy opportunity 1) now, and/or 2) after SLB reports this Friday and potentially exacerbates USL uncertainty (we're buyers on signaled weakness). PUMP is estimated to report late Mar/early Apr.
NBR released conference materials yesterday after the close (1/8/19), re-affirming prior operational guidance for 4Q18. More importantly, mgmt proposed to cut its quarterly dividend by 83% to $0.01/sh, starting in 2Q19, which will save $54 million of cash in ’19 and $70 million annually thereafter. A 10% reduction in combined G&A/R&E, or ~$37 million annually, will be further additive to FCF. A one-off SANAD cash receipt and softer 4Q capex fueled a $230 million reduction in net debt, while NBR expects capex of $400 million and continued L48 margin strength to encouragingly drive a $200-250 million net debt reduction through FY19. We remain focused on incremental color surrounding 1) int’l rig margin progression in early ’19, and 2) details on questionably-low ‘19 capex (vs. both our modeled rig count/topline growth and D&A – recall HP). The dividend cut hurts, but we see this as more cautionary than foreboding. Reiterate Land Drilling top pick.
Crude prices remain closely tethered to the geopolitics of OPEC+ and the US trade Twitter-verse, and for that we lean on higher-level insights from our colleagues on the WR Macro and WR Integrated Oil/Refining. Nevertheless, the key supply-side catalyst for OFS (beyond anticipated evidence of legacy int’l/offshore declines) is a rollover in US shale efficiency and return of the inflationary NAM barrel. This US Oil Productivity Drilldown addresses what we believe will be challenged US oil growth in ’19, particularly vs. the EIA/IEA/OPEC consensus of +1.3 mmbpd black oil. With early indication that E&Ps will continue to live within cash flow amidst recent oil volatility, we leverage our WR Production model to test US growth sensitivity to key inputs: 1) production per completion, 2) decline rate, 3) YoY frac growth.
This Wednesday (1/9/2019) at 11am we’re launching our bi-weekly Energy webcast series and we’re kicking it off with our 2019 conviction ideas and drivers for why we see a return to $80/bbl Brent in 2020. Within, we outline our high level Energy views and portfolio construct. Register here to have access to every webcast.
The last week of 2019 fittingly marked the all-time low for the WR OFS Index/OSX, and the slight bounce in the last few trading days provides little reprieve for our clients who (hopefully) had the opportunity to unplug with friends and family at year-end. Three key macro questions for OFS remain in focus for 2019: 1) the widely-anticipated slowdown in global growth and impact on oil demand/upstream capex, 2) shale capital efficiency and the pace of US production growth, and 3) legacy, conventional oil output internationally that seems to have defied the decline curve (vis a vis short-cycle maintenance spending). Equity valuation across the group (vs. historical metrics) would suggest that the market is pricing in a bearish answer to one, if not all these key questions. Have fundamentals deteriorated as much as can be surmised based on 4Q18 performance? Consensus FCF yields say “no”, as we believe the sector has reached an unprecedented risk/reward skew toward the latter. We do recognize that a global recession in ’19 would DQ this thought.
We are marketing in Dallas and Houston this week, which from a YE-timing perspective would be otherwise imprudent given that a beleaguered energy market is already looking beyond Jan-1. Nevertheless, we are thankful for the thoughtful engagement so late in the year. Moreover, we are getting better visibility into several key catalysts that could drive incremental positivity back into the space. First, US shale capital efficiency must rollover in ’19 for both the oil macro and for OFS earnings power (in the current commodity paradigm in which E&Ps appear to be sticking to CFO-driven capex, we would need to see underwhelming shale growth below the 1.8-2.0mmbpd “consensus” figure). Second, beyond internalizing shareholders over growth by way of dividend and buyback, investors need to see more consolidation within SMID-NAM services. Pumpers lend themselves well to this theme, with the group trading marginally above replacement value.
Wolfe Research Energy Analysts Josh Silverstein (E&P), Sam Margolin (Global Integrateds & Refiners), & Blake Gendron (Oilfield Services & Equipment) hosted a webcast to discuss 2019 outlooks from three different angles - E&P, OFS, Refining/Integrated key trends & top ideas for 2019; where the commodities are heading; takeaways from Thursday's OPEC meeting; what will differentiate the E&Ps; key trends we're watching IMO 2020; and more.
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