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Earnings Weatherford BH NOV

Baker Hughes

On July 28, 2016, Baker Hughes announced earnings for Q2 2016. Baker Hughes reported a loss per share of $0.90 which is substantially more than its Q2 2015 loss of $0.14 per share. Unfortunately, unlike the CEOs of Schlumberger and Halliburton (see our article) Baker Hughes sees continuing difficulties for the market. During its earnings call, CEO Martin Craighead stated as follows:

I want to finish up with a bit more on the market outlook, and the opportunities we see for Baker Hughes. As we said in early May, we don't expect to see a meaningful recovery in the second half of the year, and that's still the case. While we've seen production edge down, particularly in North America, that has been offset by additional production elsewhere. While our customers have substantially slowed, reduced, or all together canceled a large number of exploratory and field development campaigns, I've yet to see an economic catalyst that will create a step change to demand, that would lead to materially higher oil prices. In addition, U.S. crude storage levels are at record highs and there is a significant backlog of crude in the form of drilled, but uncompleted or so-called DUC wells.

On the demand side, growth is only forecasted to be modestly higher than expectations at the beginning of the year. In fact, the economic impact of recent events such as the Brexit vote leading to a stronger dollar and significantly weaker British pound has created more uncertainty and historically there's been a strong correlation between a strengthening dollar and a weakening oil price, which could continue to be an unfavorable headwind.

Many of our customers, I speak to are standing pat at today's oil prices. And yes, many say they will ramp activity as oil prices reach the $50 mark. However, like in past cycles, service sector costs will rise with increased activity and that will erode incremental cash margins for the operators. Accordingly, I believe oil prices in the upper $50s at a minimum are required for sustainable recovery in North America.

As we mentioned previously, in North America, we expect an initial increase in activity in the drilled, but uncompleted category, which today extends beyond 5,000 wells across the various basins. While completion schedules for these wells are estimated to ramp up as oil prices recover, the pace and speed of the increase will vary widely across the available inventory based on the well's economics and a large number of DUCs are not economical at $50 oil prices.

Despite a backlog of drilled but uncompleted wells to work through, we expect the North American rig count to increase modestly in the second half of 2016 driven by seasonal gains in Canada and a slight uptick in the U.S. market. I describe it as a slow grind upwards for North America. Internationally, we expect rig counts to continue slight declines in most countries for the second half of 2016. (www.SeekingAlpha.com)

 

Weatherford

On July 28, 2016, Weatherford reported earnings. The Company recorded total revenue of ~1.4 billion, resulting in a $0.63 loss per share.

CFO Krishna Shivram stated that currently, Weatherford is only utilizing one-third of their manufacturing capacity. Accordingly, Weatherford believes they can handle 2.5 times their current activity level without adding any meaningfully higher CAPEX. On its outlook for the remainder of the year,

Weatherford CEO Bernard J Duroc-Danner did state that he believes the market is turning:

Looking at Q2, a few conclusions are clear to us. NAM (North American Market) is now turning, however slowly, but turning it is. Eastern Hemisphere crossed in Q2. Same observation. Eastern Hemisphere as a whole is turning, however slowly, but turning it is. Latin America will continue to remain challenged. We don't see it turning, not in 2016…First half of this year reflected the psychology of a $25 oil market, which is essentially a forced liquidation of the industry's capabilities. Volume activity worldwide and pricing conditions reached levels unseen in any management's lifetime, including this one. Second half of this year will reflect a $40, $45 oil market psychology, which will make it the beginnings of a recovery, albeit from extraordinarily low levels.

The oilfield will slowly pull out of the extreme operating conditions it was placed under. Progress will occur, but step by step and not everywhere. Oil bears need not fret. The recovery will be short with a minimum activity levels required to sustain, let alone grow, a flat worldwide oil production capacity. This means on the whole our clients in the second half will continue to lower their oil production overall and de facto capacity. In effect, second half of this year, we won't be able to overcome decline rates either. Worldwide oil production capacity will be lower at year-end than it was at the end of Q2.

Geographically, activity gains will be predominantly land and concentrated in three regions: North America, MENA and Russia. The rest will, by and large, flatten out. NAM will slowly rise in activity with all segments benefiting. Completion and lift will be the strongest first beneficiaries as will pressure pumping. The capacity overhang in that segment limits their near-term potential. Completion, our completion, is seeing for the first time in many quarters an increase in orders and activity on a number of U.S. land plays.

Eastern Hemisphere will arrest its decline volume-wise and experience a modest recovery. Expect the first manifest rise in activity late in Q3 and squarely in Q4. This will not apply to the entire hemisphere, Russia and MENA will show by far the most improvements, both a combination of activity increases and market share gains in our case. The Gulf countries, Saudi Arabia, Kuwait and the Emirates, are the prime movers for us. Middle East will be an island of strength in the second half. There are also some Eastern Hemisphere markets that will lag, but at a minimum, these markets will stabilize with no further declines.

Latin America on the whole will start second half weak. It will flatten before year-end. The activity declines will arrest. But it will not experience much steady recovery, not this year. There will be shifts in national markets and clients, but overall, the prognosis of the market is for soft followed by flat outlook for the second half. That makes Latin America the laggard.

Over time, price recovery will be a powerful driver of financial results. Pricing worldwide, not just North America, reached levels which we have never experienced before, not by a wide margin. Pricing levels are unsustainable long term for our industry.

With the overly aggressive earlier stages of the company part of our history buried and gone, all that Weatherford focused on financial priorities and operating performance. The market is turning. It feels slow, hesitant, frail, worrisome. But make no mistake, it is as frustrating as it will be powerful when some time has run. The oilfield service industry, our industry, is a coiled spring. And within the industry, Weatherford is especially tightly coiled.

NOV

 

National Oilwell Varco, Inc. (NOV) today reported a second quarter 2016 net loss of $217 million, or $0.58 per share. Excluding other items, net loss for the quarter was $114 million, or $0.30 per share. Other items included $143 million in pre-tax charges ($103 million net of tax) primarily associated with severance, facility closure costs, and write-off of certain fixed assets.

Revenues for the second quarter of 2016 were $1.72 billion, a decrease of 21 percent compared to the first quarter of 2016 and a decrease of 56 percent from the second quarter of 2015. In reporting earnings, CEO Clay Walker stated as follows:

Like others in our space, we believe we are seeing some isolated green shoots of activity, and we are encouraged that the North American rig counts have begun to increase. We have seen demand rise in recent weeks for certain products and services for North America...

On the other hand, our rig equipment business in many international markets continued to decline. At or near the bottom of the cycle, we see considerable crosscurrents, price pressure, and shifting mix within our business. And, frankly, we're not ready to call bottom yet.

Our near-term outlook calls for modest revenue improvements in the wellbore technologies and completion and production solutions segments, offset by another quarter of declines in our rig systems segment, which we expect to flatten thereafter. We expect rig aftermarket third quarter to be down only slightly from the second quarter.

The oil industry has been decimated by a generational down cycle, but record low levels of rig activity will inevitably lead to production declines, higher oil prices, and higher activity. In the meantime, we plan for this to be a slow grind, and we still have a lot of swamp to traverse until we get to full recovery.

When the market turns, NOV will have used the present downturn to improve its efficiency and importantly advanced promising new initiatives for the industry we serve.

We believe recovery will drive higher demand for completion tools and hydraulic fracture stimulation and pressure pumping equipment where NOV occupies market-leading positions

Our outlook for technology proven by the share revolution is robust. Shale technologies will migrate to new basins on new continents, requiring new sophisticated Tier 1 land rigs, bits, downhole tools, and new drill pipe designs. Again, NOV occupies formidable positions in these markets.

Rising drilling efficiencies enabled by NOV's technologies will increase well counts, vis-a-vis rig counts, with fewer days of drilling required to create each new wellbore. This will spur incremental demand for well count-driven products and services like the production chokes, sand separation, and oil separation equipment, markets where NOV also occupies leading positions. And high rates of drilling per day will equal high rates of consumption of bits, tools, drill pipe, and rigs that we make per day.

By: Ty Chapman

Five Star Metals, Inc.

Raising the Bar for Customer Service and Quality

Twitter: @FSM_Ty: Follow me to get the latest updates everyday!

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