Themes from Q3 2022 Earnings Calls

Part 2: Oilfield Service Companies

Special Topics

In a previous post, we highlighted common themes from OFS companies’ Q2 earnings calls, which included the role of OFS in energy security, OFS operators’ focus on margins rather than market share, and industry optimism.  In last week’s post, we noted common themes from E&P companies, including a continued focus on share buybacks, moderate production growth, and the effects of inflation.  This week we focus on the key takeaways from the OFS operators’ Q3 2022 earnings calls.

Expanding Role of International Business Segments

A common theme among OFS operators included the prevalence of quarterly growth in international segments and expectations of continued optimism among international segments.  Executives noted that this growth is primarily driven by the need for updated oilfield equipment and technology outside the U.S.  Their optimism is further enhanced by the surging U.S. dollar’s effect on overseas freight costs and labor.  As broad-based activity increases tighten equipment availability, this will further drive price increases within global business segments.

  • “Over the last few months, we booked orders for equipment into the Middle East and Africa.  We’ll continue to selectively target international markets as we progress plans for more meaningful growth abroad.  On the supply chain front, transit times and overseas freight costs are improving…while a strengthening dollar further supports improving margins.”
     – Scott Bender, CEO, Cactus Inc.
  • “Our third quarter performance demonstrates the strength of our strategy to deliver profitable international growth through improved pricing… International revenue in the third quarter for the C&P [Completion and Production] and D&E [Drilling and Evaluation] divisions grew year-over-year from a percentage standpoint in the high teens and mid-20s, respectively, which outpaced international rig count growth and reflects our competitiveness in all markets.  Our year-over-year growth and the margin expansion demonstrated by both divisions give me confidence in the earnings power of our international business.”
    Jeff Miller, Chairman & CEO, Halliburton Company
  • “I think international markets, in particular, have a long way to go in stepping up their technology that they apply in… in their drilling operations.”
    – Clay Williams, Chairman, President & CEO, NOV Inc.  

The Suspected Result of Near-Term Market Tightness — Long-term Sustainable Growth for Oilfield Service Companies

OFS operators attributed expectations of steady and sustainable growth in their business to near-term tightness in the hydrocarbon commodity market.  Without an immediate fix to the current supply and demand imbalances, equilibrium in the global oil and gas commodity marketplace will require years of investment to level.  The imbalance may be further prolonged by E&P companies focusing on returning cash to shareholders.

  • “While broader market volatility is clear, what we see in our business is strong and growing demand for equipment and services.  There is no immediate solution to balance the world’s demand for secure and reliable oil and gas against its limited supply.  I believe that only multiple years of increased investment in existing and new sources of production will solve the short supply… [E&P operators’] commitments to investor returns require a measured approach to growth and investment.  Service companies follow the same discipline, delivering on their commitments to investor returns and taking a measured approach to growth and investment.  What I think is underappreciated is how this results in more sustainable growth and returns over a longer period of time.”
    – Jeff Miller, Chairman & CEO, Halliburton Company
  • “There’s very little used equipment that really can be refurbished economically, and what we’ve seen over the past year is more and more pressure pumpers in North America are pivoting towards buying new and the longevity and sort of the overall value offered by going to new versus used, I think, is a lot stronger.”
    – Clay Williams, Chairman, President & CEO, NOV Inc.
  • “And there’s some drill out rigs that, again, what a couple of our customers have said is that they wanted to –they were out of budget, they were out of wells to complete.  They wanted to stop that in kind of mid-Q4 and then pick them back up in Q1.  Now we’ve had demand that’s kind of been building up behind, and so most of those rigs have already been redeployed… We’re now in a situation where even though there was some budget exhaustion, those rigs are now being put to work.  And we know we have demand coming on the backside and 2023.”
    – Melissa Cougle, CFO, Ranger Energy Services Inc.

E&P Production Growth Plans Concentrated Amid Strict Budgets

As highlighted in a theme from last week’s post, domestic E&P production is expected to rise, albeit modestly.  This growth is concentrated among certain large contracts; though the top lines may indicate relatively gradual and steady growth across the board, production growth is more concentrated among certain E&P operator plans.  More generally, a limitation on broader growth for oilfield services companies in the near term is attributable to the E&P’s limited budgets.  Considering the fragmentation in domestic production plans, some OFS companies have sought growth through acquisitions.

  • “In terms of concentration, I’m going to guess that two-thirds — maybe a half to two-thirds — have to do with additions from our existing customers, which would be the publics and the other would be new logos.  So, I guess the short answer is, [plans for production growth are] certainly concentrated with the large publicly traded E&Ps, at least ours.”
    – Scott Bender, CEO, Cactus Inc.
  • “For the fourth quarter, we expect growing opportunities associated with our Completion & Production Solutions segment’s backlog to be mostly offset by certain projects that were pulled forward into the third quarter and supply chains that remain elongated, resulting in revenues that should be relatively flat.”
    – Jose Bayardo, SVP & CFO, NOV Inc.
  • “It is clear that our acquisitions executed last year are now delivering strong returns, demonstrating the value of our consolidation strategy for Ranger and for the sector more broadly.  The Ranger management team and board believe that consolidation remains an essential and ongoing process for the company within both existing and adjacent product lines.  And we continue to be actively engaged on this front.”
    – Stuart Bodden, CEO, Ranger Energy Services Inc.

Mercer Capital has its finger on the pulse of the OFS operator space.  As the oil and gas industry evolves through these pivotal times, we take a holistic perspective to bring you thoughtful analysis and commentary regarding the full hydrocarbon stream, including the ancillary service companies that help start and keep the stream flowing.  For more targeted energy sector analysis to meet your valuation needs, please contact the Mercer Capital Oil & Gas Team for further assistance.