At this point, it’s old news that oil prices have cratered. Supplies continue to be elevated, while demand is pretty nonexistent.
“Lower for longer” seems to be the key mantra being uttered by many energy stocks. As a result, capex spending continues to fall by the wayside. That falling capex is a big problem for the various energy stocks that provide all the hardware and technology needed to drill, frack and complete oil and natural gas wells.
And while plenty of smaller oil service firms won’t survive the downturn, giants like Schlumberger (SLB) and Halliburton (HAL) will. Longer-termed investors could use the current downturn in oil — and their share prices — to load up on the energy stocks for the eventually rebound.
The question is, which one will provide a better bang for your energy stock’s buck.
SLB Stock- For Schlumberger, the Key Is Global
Unsurprisingly, SLB’s latest earnings weren’t pretty. Continued lower oil and natural gas prices saw its third quarter earnings tank by 49%. Revenues also took a bit hit as pricing weighed on profits. All in all, SLB’s earnings were pretty depressing and sad.
However, the real sad thing — and what could have investors reaching for their antidepressants — was SLB’s conference call.
Schlumberger’s CEO Paal Kibsgaard was very pessimistic about the oil price recovery and drilling activity in North America. Potentially, “lower for longer” could mean that oil prices won’t really recover until 2017. And considering the overcapacity still in the North American oil services market, this could be the final death knell for many smaller energy stocks in the sector.
As it stands, SLB saw its North American earnings shrink.
As dour as that sounds, it also highlights just why SLB is winning. Schlumberger is a global force in the oil services sector.
SLB receives the bulk of its revenues from overseas markets and is the oil services leader in both the Middle East and Asia. These regions have held up better, as declines in drilling activity haven’t been so severe.
Part of this has to do with the fact that the majority of the drilling in these areas is done by state-owned or national oil companies. The mandate isn’t so much, pleasing investors, but keeping the oil flowing for the state and citizens. As such, contracts tend to be more stable and persist in downturns. On the call, Kibsgaard noted how activity in the Middle East remained robust, with Saudi Arabia, the United Arab Emirates and Kuwait leading the way.
The real reason for the 7% downturn in SLB’s international revenues came from Brazil and the scandal/issues resulting from state-owned oil firm Petrobras (PBR).
PBR is cutting pretty much every dollar it can to help deal with the scandal and collapsing Brazilian economy. And while there were some other dour regions, by and large, the international market for drilling/oil production isn’t collapsing as bad as it is here in the United States and Canada.
This point brings us to SLB’s main rival.
Two Big Issues for Halliburton (HAL)
Like SLB, Halliburton’s earnings weren’t exactly that great.
OK, they were pretty abysmal.
HAL managed to report 31 cents per share in profits. What’s great is that this number beat analyst estimates. What’s bad is that it’s a 74% decrease versus the same quarter a year ago. Revenues pretty sank terribly as well.
Ouch.
The problem for King HAL is that it’s a kind of a one-trick pony, and that horse happens to be named America.
Unlike rival SLB, Halliburton still is the king of fracking here at home. North America still makes up the bulk of its revenues and things are especially bad here at home. Over the third quarter, HAL saw its North American revenue drop by 47% year-over-year and its profits swing from $765 million to a loss.
With HAL — as well as other analysts — calling for more capex slowdowns in North America coming during the fourth quarter, things could get ugly for the energy stock.
The reliance on North America is one of the reasons why HAL offered to buy out smaller rival Baker Hughes (BHI). Combined, the duo would have a decent footing in international oil services.
Unfortunately, that deal may not go through, or at least not in the fashion they want.
The tie-up is now facing regulatory hurdles in Australia — a major market for the pair thanks to rising natural gas and coal seam gas drilling. The Australian Competition and Consumer Commission (ACCC) — the main antitrust administration in the nation — has raised concerns about the deal and has pushed back its deadline for a decision until mid-December.
Already, other legislative bodies have expressed antitrust concerns over the deal and have forced HAL and BHI to begin selling off divisions to satisfy the requirements. There’s a chance that the newly formed company won’t even be what HAL had wanted in the first place after all these divisions are sold.
And there’s a still a good chance that the deal won’t be approved.
SLB Gets the Win
The problem is that HAL’s current core are of oil services — North America — isn’t going to be rebounding anytime soon. That will continue to put pressure on earnings, cash flows, revenues and ultimately, dividends.
Halliburton isn’t in survival mode just yet, but a couple of quarters and things should get really dicey.
Add in the fact that the main catalyst for international expansion — the BHI merger — possibly won’t go through as planned and HAL is starting to look like a weaker player in the energy sector. An expensive weaker player at that. HAL currently can be had for a lofty price-to-earnings ratio of 126.
SLB is much cheaper, with a more down-to-earth P/E of 29, and it already has many of the things going for it that Halliburton is wanting from the BHI deal.
At the end of the day, SLB stock is looking like the clear favorite in the oil service industry.
And that’s who investors should bet on in the sector.
As of this writing, Aaron Levitt is long the Vanguard Energy ETF (VDE) –which holds BHI, HAL and SLB shares.
