Service crew

Halliburton and other oil services stocks face a big test. What to watch.

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Pricing and margins are improving for companies like Haliburton.

The time of dreams

Oil service and equipment companies collapsed after the last oil crisis, leaving them lean as oil boomed again. This momentum could be good for prices and margins in the coming months, and analysts are getting more excited about stocks.

Companies are expected to start reporting their first quarter results this week, starting Tuesday with


Halliburton

(HAL). Other big names in the industry include


Schlumberger

(SLB) and


hugue baker

(BKR), who are expected to report their earnings later in the week. There are also several smaller companies that will be reporting over the next two weeks, including


Patterson-UTI Energy

(PTEN),


Helmerich and Payne

(HP),


Nextier Oilfield Solutions

(NEX) and


Liberty Oilfield Services

(LBRT).

Businesses have done well this year as they finally see demand picking up. This sets the bar high for winnings. the


PHLX Oil Services Index

is up 60% this year.

All major service companies have downsized their workforces and operations in recent years, a trend that accelerated during the height of the pandemic. Oil companies were unwilling to spend on drilling new wells when oil prices were low, and companies no longer wanted to carry idle equipment on their balance sheets.

With the rise in prices, producers are once again looking to expand and have to pay to find the right teams and the right equipment. Citi analyst Scott Gruber wrote that “Oil Services pricing power not only appears to be in place, but is gaining momentum as E&Ps want to avoid losing an effective team and avoid the risk that comes with a team. of substitution”.

While most publicly listed producers are slowly ramping up production to satisfy their austerity-conscious shareholders, private operators have been quick to add rigs. The number of rigs in the US is finally growing more steadily, a good sign for service companies.

For much of the oil recovery that has now lasted nearly two years, oil service companies have lagged. Most of every new dollar earned from drilling went to producers. But Gruber thinks the balance is shifting. “E&P economics have never looked better relative to oil services economics,” he wrote.

“This suggests that the economic rent within the shale value chain should increasingly flow to oil service companies over the coming quarters. As such, we see rising consensus estimates for many nationally leveraged oil service names and would look to take advantage of any weakness in stocks during earnings that appears driven by short-term factors.

Because of this dynamic, Gruber thinks Wall Street could end up being surprised by the strength of Halliburton’s Patterson-UTI earnings.


Helmerich and Payne
,

Nextier and Liberty.

Still, other analysts see the potential for disappointment. The oil and gas supply chain has been tricky, with prices for steel, sand and other key process components rising. And Covid restrictions around the world in the first quarter could send numbers plummeting, warns Taylor Zurcher, an analyst at Tudor, Pickering, Holt & Co. Zurcher expects investors to pay close attention to company discussions in the second semester. He thinks North American service companies, which would include companies like Patterson-UTI, are well established to generate profits.

Halliburton’s gains should set the stage. The company is expected to earn 34 cents per share on revenue of $4.2 billion, up 22% from a year ago, according to FactSet.

Write to Avi Salzman at avi.salzman@barrons.com