Oil Services&Equipment:Weekly Insights&Analytics,U.S.Activity Analysis Points to Heightened Risk of a Narrower Recovery
We published a deep dive on the U.S. onshore market yesterday and rolled ourprice targets to Dec-2017, with average upside inching up only 2% from priorlevels and minimal upside from current share prices. In our updated base case, wenow assume the call on U.S. shale oil production is ~600k bbl/day in 2018y/y(with WTI in the $50s). The results of our analysis led to a 9% decline in our basecase U.S. rig count in 2018to 765(from 850), and we envision a recovery that ismostly confined to the Permian. That said, we are relatively more optimistic oncompletions versus drilling; while we think the current active frac fleet can absorb~20-30% higher activity levels before the market would need materialreactivations, our scenario analysis suggests land rigs would need a far morebullish outcome (call on shale +1-2mm bbl/day) to fully tighten the horizontal rigmarket. Meanwhile, we remain relatively negative on the offshore capital cycle,and see downside risks to shorter-cycle service exposures (sell OII, offshoredrillers). Our updated SOTP valuation of NOV points to elevated short cycleexpectations for the stock. As the fall conference season continues to offer furthersigns of the recovery pushing right, we are sensing increased uneasiness with thebull thesis for U.S. onshore, and recommend taking profit on consensus longtrades (BHI, FET, HP, PTEN, SPN), while shifting towards more defensivenames. On a relative basis, our top picks in large caps remain SLB and HAL;in small caps CLB, MRC and TTI.
DNOW initiatives gaining traction; investor expectations heady. We spenttime on the road with DNOW’s CEO Robert Workman last week and cameaway impressed with the early customer traction gained on both ProcessSolutions and Supply Chain. However, we remain concerned about a mismatchbetween investor expectations and the balance sheet’s ability to facilitatefunding for a recovery in activity, M&A and further expansion of ProcessSolutions. We rate the shares Neutral.
Oil prices spiral down amid signs of persisting supply glut. WTI/Brentdeclined in the past week, finishing down 6%/5% to $43/$46on a bearishupdated outlook provided by the IEA last week coupled with rising output levelsof some OPEC nations. Nat gas finished up 1% to $2.93. Oil forward curvesmoved down, with WTI now averaging $48/$51in 2017/2018.
OSX down 4% in the past week v. S&P 500decrease of 1%. Our coveragegroup declined 5% in the past week, mostly following the OSX. Large Caps ledthe group (-3%) while Offshore Drillers lagged (-7%). ASPN (6%), PTEN (1%)and TCW (flat) led; WFT (-11%), NE (-11%), TTI (-9%) lagged.
Rig count roundup: U.S. down 2w/w, tracking +12% q/q. The U.S. rig countdecreased by 2rigs last week, driven by gas (-3) while oil inched up (+2). TheBHI count stands at 506. However, RigData showed an increase (+9rigs to480). The BHI U.S. rig count is up 12% q/q but down 50% y/y QTD. Canadianrigs decreased 2w/w to 132, showing the third consecutive weekly decline(-10% off August high), edging slightly above last year’s comparable decline of7%. The rig count is now up 141% q/q but down 27% y/y QTD. The GOMcount increased by 2rigs to 20, 35% lower y/y YTD.