The big drop in crude oil prices since August has made big waves in multiple industries within the Energy sector. Beyond the Exploration & Production companies, the next group to feel the impact of cutbacks in production is the oilfield services.
Baker Hughes (BHI), Halliburton (HAL), and Schlumberger (SLB) are the “big 3” in this industry and the guys who bring the equipment and run the drilling or fracking rigs for the E&Ps who either own or lease the land.
Earnings estimates had to come down for all three recently. Here was a note from FBR Capital Markets analysts in late October explaining their moves…
“As anticipated, we are lowering estimates for SLB, BHI, and HAL on the (1) step-down in oil price ranges, which our energy team believes signifies that the next secular era has drawn much closer, if not dawned (that of oil abundance or a return to cyclicality); (2) geopolitical and/or macro challenges in Russia, Libya, Iraq, and China; and (3) slowdown in deepwater E&P spending.”
Baker Hughes is also known in the industry from providing regular updates on their rig operating capacity. Energy investors and oil sector traders watch these “rig counts” for clues about the pace and direction of exploration and production. From FBR again…
“Underpinning our onshore NAM cuts, we are reducing our average BHI U.S. land rig count forecast for 2015 by 45 rigs from 1,880 to 1,835. So, off our average 2014 projection of 1,804, the count is now expected to grow by just 2%, down from 4% previously. In effect, we are removing the first layer of vulnerable 2015 drilling programs, those most threatened, if not already uneconomic, at sub-$90 WTI.”
The analysts summarized in their report that they were decreasing EPS estimates for the “Big Three” by an average of 14%, “which is significant but not nearly as bad as
what the stocks are still discounting.”
They were not alone in cutting earnings estimates for BHI with about 70% of the 18 covering analysts dropping this year’s consensus EPS projection to $4.03 from $4.19 within the past 30 days.
But the 2015 estimates took a much bigger hit of nearly 11% when the consensus was slashed to $4.98 from $5.58 in the past 30 days.
The analysts at FBR may be right that stock prices already reflect deeper potential estimate cuts. And most analysts were late to cut, so they could be late to raise again. But trying to pick the turnaround in share prices will still be difficult.
So the safe strategy is to wait until the estimates stabilize and actually turn back north. The Zacks Rank will be your first signal.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money Trader.
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