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.
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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.
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.
Hard to imagine the sector carnage had OPEC not reached its decision to cut last week, but the reality is that the N-T crude balance remains remarkably fragile with unyielding US growth, lack of legacy deepwater declines, and the demand outlook tethered to twitter-fueled consternation. Cycle visibility remains limited by the ebbs and flows of an increasingly short-cycle oil market, so while WR Energy remains L-T constructive on crude ($65/$75 WTI/Brent in ’20), we are lowering forward multiples across our OFS coverage in-parallel with where we see sentiment. A downward inflection in shale capital efficiency remains the ultimate catalyst.
This week, we are on the West Coast marketing with WR Integrated Oil/Refining/LNG Analyst Sam Margolin. The trip is timely given two highly-anticipated catalysts for the oil price, and based on our marketing conversations around what has become both a fragile and volatile commodity environment, the next two weeks will be crucial for OFS. Friday (11/30/18) kicks off the G20 Summit in Buenos Aires, where investors hope to see some resolution for, or at least clarity on the magnitude of, the US-China trade war (as it relates to the demand side of the global oil balance). In terms of the Oct 6th OPEC meeting, most investors remain confident in the re-establishment of near '16-level production cuts, while a select few see more of a 50-50 possibility. One could argue that a relative lack of spare capacity should invite cuts (even if recent, bearish US production data is inaccurate), but a precarious US-KSA geopolitical paradigm and peripheral Iran/China implications make for a number of possible outcomes next week. We will circle back on the fundamental OFS takeaways following this week's marketing ventures, but clearly N-T group performance will be driven by the outcome for oil.
The markets certainly aren’t providing much to be thankful for and Thanksgiving can’t come soon enough. We wish all our clients the best through thick and thin, but certainly during this exceptionally trying market pullback. Have a Happy Thanksgiving, hopefully the break will provide some perspective for all and help calm the market. CHOW within details how the OSX has historically traded pre/post-Thanksgiving, the takeaway being that post-TG could provide a much-needed reprieve from several weeks of severe underperformance. Click the full note to take a look…
We are rolling out the inaugural edition of the weekly Roughneck Rumblings in an understandably trying time for our clients. Our goal is to stay ahead of the OFS conversation (however muted it may currently be) and try to improve the research process in any way that we can. Each week, you can expect 1) incremental thoughts on the group, 2) a chart of the week (and/or roughneck rumblings – feedback from the field), 3) links to pertinent WR Energy publications, multimedia, and news, 4) various WR/consensus, valuation, and performance charts (with unlimited transparency into how our calls are working), and 5) a slew of up-to-date industry data (including RigData analysis of rig types, contractors, and customers by US basin). We welcome all feedback and ideas for bespoke items to include on a more regular basis.
NOV hosted an analyst day today (11/6/18) in Houston, and beyond the high-quality, racecar-themed hype videos provided a comprehensive overview of each business segment. In aggregate, ‘19 guidance was mostly in line with both our prior estimates and street estimates with some finetuning to be done on the segment level. NOV’s three-year outlook was more unexpected and provides some context for NOV’s underlying earnings power if the recovery plays out as they envision. Our view of the recovery remains somewhat incongruent with NOV’s however, primarily given our more cautious view of the offshore recovery cadence. We’re tweaking our estimates to reflect ‘19 disclosure. Our 2020 estimates remain largely unchanged and we maintain our PP rating and $34 YE19 PT, based on 10.5x our ’20 EBITDA of $1,492MM (up from $1,489MM).
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