Citi’s Robin Shoemaker does not think the major oil services companies will beat Q2 estimates, but he sees upward revisions for 2009:
Amid signs of accelerating global demand for oil services, second quarter earnings should confirm that the five-year industry upturn is firmly on track. While we do not expect the major oil service companies to beat consensus estimates for the quarter, we do believe they will share information on market conditions, backlogs, and pricing trends that could lead to upward EPS revisions for 2H08 and 2009.
While Shoemaker concedes that in the near-term prices will be driven by crude prices, which have fallen sharply in recent days, a coming price increase may deliver more upside:
North America will be a prime area of focus, especially with respect to price increases that the service companies may be planning for the second half of 2008. The strong growth in the U.S. rig count in 2008 is a favourable backdrop for price increases, and the oil service companies are expected to push as aggressively as they can on that front. We look for announcements of price increases in pressure pumping services, land rig rates, down-hole tools, and reservoir measurement and production services.
Shoemaker also expects M&A activity to continue to grow. While the credit crunch has complicated financing in other sectors, M&A in oil services has largely weathered the storm:
In spite of the global credit crunch, oil services M&A deals involving public and private companies continue to be announced, financed, and completed. Given the strong pace of M&A in 2Q08, the
major service companies are likely to re-emphasise the important role that M&A plays in their ongoing global expansion. We expect companies that have not done deals recently, such as HAL, to push harder in that direction.
Shoemaker’s top picks (all rated Buys) are National Oilwell Varco (NOV), Cameron International (CAM), Halliburton (HAL), and Schlumberger (SLB).