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YTD, our ‘NAM bucket’ of OFS stocks are down ~60%, where the ‘survivor’ counterparts (SLB, TS, NESR, BKR, among others) are only down ~50%. Since the mid-Mar sector bottom however, the NAM-centric names have outperformed, despite the fact that fundamentals shouldn’t materially improve as long as WTI remains below $50. Entering the year, consensus saw a 10-15% Y/Y decline in NAM spending/activity, whereas now the bogey is a 50-60%+ contraction. We think the market is pricing in too much of a ‘V-shaped’ recovery in NAM activity & earnings, and in fact see rig/crew adds at $35+ WTI as detrimental to OFS cash burn. Perhaps symptomatic of the broader market small cap/beta rally, the NAM vs. ‘survivor’ trade (in our view) is a rare opportunity in which a potential N-T unwind aligns with the longer-term call for better global upstream balance & earnings power recapture for the ‘survivors’ (as US shale becomes a smaller portion of the growth in the next expansionary cycle). While we count HAL in the ‘survivor’ bucket, this performance trend is especially evident in the recent ‘flippening’ of the SLB-HAL EV/EBITDA multiple spread. Traditional valuation metrics have deteriorated, but within we show recent NAM vs. ‘survivor’ performance & EBITDA multiple trends, highlighting that unwind of the trade since mid-Mar (either through ‘survivor’ catch-up, or NAM cool-off) dovetails with our call that structural contraction in US shale is positive for the longer-term outlook of more globally-diversified names. 

1Q20 E&P earnings have corroborated the grim 2Q/2H20 outlook for OFS. Activity and pricing are forging new lows as upstream capex is cut in half or worse. Within we tabulate update budget guidance for the largest E&Ps, present respective rig count and frac spread guides, and present a list of choice quotes from each call. Acceptance is the first step to recovery

Through 2.5 weeks of earnings, the bulk of OFS companies have given an honest go at framing the N-T outlook for an otherwise opaque global oil patch. We believe OFS consensus now captures a 50-60% Y/Y spending decline in USL, with a sharper drop-off in frac activity (vs. drilling) as operators shut in production (and perhaps build DUCs for the oil upswing). E&P earnings have ramped up in earnest this week, with operators signaling a ‘flattening’ of production in 2H20 (after a ~20% N-T step down with shut ins), with potential aspirations for (modest) FY21 growth even in a sub-$40 oil environment. To us this is surprising commentary, and runs somewhat counter to the logic laid out in our global upstream rebalancing note (link), in which we argue that a more disciplined, returns-focused USL collective would shy away from growth below $50 WTI (and that the spending mix-shift to int’l offshore would restore OFS earnings power over the medium/longer-term). We received both constructive feedback and pushback from the note, beginnings of what we anticipate will be a vibrant debate over the future of US shale. We think the debate boils down to the “true breakeven cost” of the Permian vs. int’l/offshore activity, and the IOC formula to optimize returns (breakeven advantage non-shale?), cycle time (advantage shale), and other exogenous/geopolitical risks (adv shale?).

Given the lack of visibility and inability to accurately forecast even a quarter ahead, it seems somewhat pointless to update models out to FY21 (until we get visibility into the fate of an overleveraged E&P collective, and an updated IOC strategy in shale-link). This will be a pervasive theme across US-centric OFS through 1Q20 earnings. For S-T investors, PTEN’s decision to stick with frac was perhaps the incremental (negative) take from the call, but we recognize that only time will tell whether the decision was prudent from an EV preservation perspective. Perhaps its logical for PTEN to assume a med-term recovery (within 18-24 months), otherwise the company & peers have bigger problems. Running frac gives PTEN upside torque relative to drilling peers.