NBR returned to the well-followed OFS playbook of capital discipline. Despite the operating miss (evidenced by NBR shares opening -6%) and likely take-down of consensus, color round $600-700 million in net debt reduction by YE20 overshadowed the softer 1Q19 guide. Our bull thesis remains tethered to int’l margins eventually enriching FCF growth, but this has been slow to play out. If USL super spec resilience overshadows NT int’l sluggishness, we see upside to the current valuation as solvency concerns abate.
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PUMP continues to defy peer performance and investor doubt in terms of its improving EBITDA/spread. Perhaps more powerful on the call was the unwavering NT profitability outlook for the legacy fleet, despite continued USL degradation signaled by peers. PPS deployments will dilute EBITDA/spread slightly, but as PUMP shifts to a slower capex cadence in-step with E&Ps, unmatched visibility further de-risks the sector-high FCF yields that we forecast for ’19 and ’20. Firmly entrenched as the gold standard of pressure pumping, PUMP is overdue for a rerating, in our view.
This week, IOC analyst Sam Margolin published a E&P ‘19 Supply (link) note that aggregated production guidance among US E&Ps (and IOC players). He asserts that guidance implies +0.8-1.0MM US black oil growth from 4Q18/4Q19, appreciably below the +1.6MM TTM cadence and notably back-end weighted. Recall in our Jan US Productivity Note (link), our bottom-up WR Production model cited appreciable downside to US growth by way of 1) E&P underspend, 2) US productivity rollover (new prod/well), and 3) decline rate acceleration; the base case of +1.0MM US black oil growth exit-exit (+1.3MM YoY avg) was predicated on +10% E&P capex growth in USL, productivity held constant. Some OFS deflation accounts for the difference in activity needed to reach our/Margolin’s conclusion, but thesis stands – 1) underspend could yield a 1H19 US oil shortfall in-step with lower imports, 2) productivity declines could become more evident as E&Ps ramp D&C in 2H19, and 3) unlike in ‘18, back-weighted growth in ‘19 will be absorbed by an IMO 2020 call on light-sweet.
NBR reported 4Q18 earnings after market close today (2/26/19) and is hosting a conference call to review results tomorrow (02/27) at 11am ET (10am CT).
PUMP reported 4Q18 earnings after market close today (2/26/19) and is hosting a conference call to review results tomorrow (02/27) at 9am ET (8am CT).
There has been a flurry of managerial changes within the oil and gas sector recently and over the past several years. In OFS specifically there has been considerable managerial turnover in the past cycle, notably with BHGE, HAL and WFT all appointing new CEOs within the past two years. SLB stands out within that context given its managerial continuity relative to its diversified peers. The CEO role at SLB is arguably the single most influential and high-profile role in the OFS sector and thus under constant scrutiny. For that reason, there is near-constant speculation about a potential “changing-of-the guard” at Big Blue. The early Feb appointment of Oliver Le Peuch as COO of SLB has further fueled speculation that succession planning in currently underway.
We lowered our target multiple last December to capture 1) uncertainty around CEO Rocca’s bribery investigation, and 2) lack of oil/activity visibility, which underpinned aggressive cons revenue growth in ‘19. In 4Q18, TS beat both revenue and FCF expectations, and was slightly more upbeat in its 2019 outlook, signaling particularly strong FCF. Exogenous trade/legal risk remain, but we are re-rating upward to 8.5x (from 7.0x) our 2020 EBITDA estimate of $2.1B (still a discount to the WR Cap Equip average of 11x), due to what we view as better operational visibility backed by increasing capital efficiency tailwinds. We maintain TS Peer Perform but raise our PT to $32 (from $28).
TS reported 4Q18 results today AMC and executed in-line with prior consensus, with better-than-expected revenue growth partially offset by modest margin compression. To us, risk seems skewed to the upside vs. TS’ FY19 outlook, with any offshore pull-forward or USL expansion as potential catalysts. 4Q18 was punctuated by a robust FCF beat (vs. our number), and positive commentary around capital efficiency/intensity would suggest stronger FCF to come in ’19 than previously expected.
No thesis changes (or rating/PT) for APY & SPN, although SPN’s strategic messaging won the day. Solid OFS day with APY adding visibility and clarity to the execution track record, while SPN touted solid non-frac results supplemented by capex discipline. We remain cautious on SPN, simply given the continued lack of clarity around the int’l cycle – although SPN appears to be taking full advantage of swift increases in well complexity, as it aims to deploy outsized growth capex in carving out new design spec niches in DPS, Production, and Technical Solutions.