Search Coverage List, Models & Reports
Search Results1-10 out of 212
In lieu of a clear recovery in the fundamentals, and with FY21 estimates all over the place, it is reasonable to assume that cost execution and the ‘upsizing’ of reduction targets will be the primary driver of stock performance. We’ve caught up with roughly half of the larger names in our coverage, and our sense is that there isn’t much juice to squeeze for certain names. That said, 2Q20 could prove to be another margin surprise for names like HAL & NOV.
Our NAM OFS Expert Access event bore fruitful discussions with folks across a number of key product and service lines. Plenty of insights into ‘Big 3’ globally diversified OFS as well. We came away from the event incrementally cautious on 1) 2H20 service pricing (most of a 20-30 supplier bids seems tight around a low, cost-covering level, but predatory behavior is still prevalent), and 2) the resulting US shale supply response (even if E&Ps moderate spending growth, could OFS pricing underwrite too much production growth?). As it relates to our overall, ‘global upstream rebalancing’ thesis, we’re still cautious on a fragile oil macro (staying away from NAM OFS entirely).
Earlier this week, we held a ‘NAM OFS Expert Access Event’, which featured a day of fireside chats with both c-suite mgmt & ops/sales/technology contacts across both public and private OFS companies in key product & service lines. The goal of the event was to better frame the anticipated 2H20 recovery in USL, and discuss longer-term trends amidst the worst, single-quarter activity collapse in OFS history.
Yesterday (06/23/20) AMC, CLB announced that it had amended its credit facility to include, among other changes, an increase in the net leverage covenant (from 2.5x to 3.0x) for its credit facility. Additionally, the company upsized its cost-out program by over 30%, targeting annualized cost savings of $61M achieved by the end of 2Q20. While we assume that upsized cost reductions portend an incrementally worse earnings outlook for FY20, we view the covenant amendment as markedly positive. In our May NDR, investors cited N-T covenant risk (not maturity risk) as the overwhelming uncertainty in an otherwise improving CLB thesis. Fundamentally, we continue to believe that CLB will benefit from 1) global upstream rebalancing (mix-shift away from US shale), and 2) gradual normalization of oil supply cuts. We have not yet updated our model with quantitative takeaways from the press release (likely lower FY20 consensus & slightly higher interest payments, partially offset by upsized cost-out), but view the effective covenant relief as constructive for the longer-term outlook.
This past week, we dug a bit deeper into SLB’s recent industry address, in which Olivier Le Peuch (OLP) outlined a re-organization plan that would see ~$1.5B in ‘structural’ cost-out (in addition to $200 million in lower R&E and appreciably lower dividend/capex/APS/multiclient spend). Our sense is that the ongoing middle management ‘purge’ constitutes the bulk of the $1.5B cost out, and in our follow up the company alluded to “much larger” variable cost reductions alongside activity declines. This squares with the fact that SLB stock didn’t react all that strongly to the initial conference commentary, but saw outperformance the following trading day as the company clarified its cost-out targets.
This coming Tuesday (6/23), unique perspective from NAM OFS experts across the upstream value chain. On Tuesday, we will be hosting our first OFS Expert Access day, this time focused on North America (NAM) with key contacts across the major product & service lines. Our contacts manage sales and operations across directional drilling, cementing, logging, frac, coiled tubing, and artificial lift (among others), with additional insight into most of the pure play & diversified service providers (including the ‘Big 3’) in NAM.
Yesterday (06/16/20), SLB’s industry address provided a fairly comprehensive update of the company’s strategy amidst the “the most challenging quarter in [SLB’s] history”. We think the cost-out number is appreciably higher, given what we see as deeper middle mgmt reduction and the broader undoing of a bloated “Transformation” support structure (put into place by prior leadership). In traditional OFS, it is clear that SLB is leaning into remote ops & the ‘rental model’ to insulate from the hypercyclicality of field service delivery, and we think that in some geomarkets this strategy is used to preserve technological incumbency (or access fragmented service markets like China onshore/CNPC logging). The ‘New Energy’ directive is interesting, although difficult to pin down in terms of near/med-term market opportunity. More thoughts to come.
The broader market and oil prices have both rallied significantly from respective lows, while OFS stocks in our coverage are up over 200% on average from mid-March levels. While OFS stocks are familiar with the ebbs and flows of rapid cycles, the extent of multiple expansion this year is truly unprecedented. In 2015 and 2016, multiple expansion was relatively measured and moderate relative to 2020 in which multiples have more than doubled since the start of the year. The consensus 2021 EBITDA multiple for HAL is up 250% from 12/31/2019, outpacing the 75% increase for SLB. HAL now trades at valuation premium to SLB for the first time in recent memory, although perhaps some downside risk to SLB estimates by way of worse-than-expected E-Hemi contraction. Within, we present charts that illustrate 1) rapid SLB/HAL multiple expansion vs. the prior downcycle, and 2) the breakdown of both consensus ests and valuation vs. those at YE19.
“Relatively high investor interest, which I don’t understand”. Quote-of-the-week from one of our covered companies, in response to the past week in which investor interest seems to have picked up off of “generationally-low levels” (also as described by the contact). Save-the-date: On June 23rd, we will be hosting a ‘NAM OFS Expert Access Day’, with industry contacts across key US-centric OFS segments. In our view, this day of fireside chats with folks from ops/sales/middle mgmt should provide investors with a differentiated, field-level perspective on the anticipated 2H ramp in USL activity, to supplement takeaways from the ongoing energy conference season. Covered companies also participating (1x1 will be available). More details to come.
- 1 of 22
- next →