Clues About The Oil Services Cycle

By Eric Fox | October 28, 2009 AAA

Until the current downturn, things have been going so well for so long in the energy sector that many investors may not even remember the duration or intensity of previous downturns in the industry. Thankfully, the energy sector has many management teams that have seen several cycles, and this knowledge and insight is shared during earning season on conference calls.

IN PICTURES: Digging Out Of Debt In 8 Steps

First Up
Halliburton (NYSE:HAL) was one of the first oil service companies to report earnings, and Timothy J. Probert, the President of the Drilling and Evaluation Division, provided his thoughts on the current cycle in the North American oil services market. Probert feels that the current cycle is most reminiscent of the 2001-2002 cycle in oil services.

"In 2002 gas directed rig counts rebounded from trough levels and were then range bound for around 33 weeks versus being range bound for around 17 weeks at this point in the 2009 cycle," said Probert.

If this pattern holds and Probert is correct, the rig count will stay relatively flat in the first half of 2010, before increasing sharply. Probert also cited the inventory of drilled but not yet completed wells, which now totals 1300-1500. When these wells get completed, it will boost supplies and perhaps send natural gas prices down.

However, Probert said that most of the wells are in the Barnett Shale, and thus represent a large backlog of hydraulic fracturing work to be done. This will help Halliburton, as well as its competitor BJ Services (NYSE:BJS), which has a high percentage of revenue from hydraulic fracturing.

Baker Hughes (NYSE:BHI) is purchasing BJ Services in exchange for $5.5 billion in a cash and stock deal. (For more on M&A's, see What Makes An M&A Deal Work?)

Cautious Optimism
Schlumberger (NYSE:SLB) is another oil service company that usually makes extensive comments on the oil services cycle during conference calls.

Andrew F. Gould, the CEO of Schlumberger, said that oil and gas saw strengthening demand during the third quarter of 2009, and that "the demand for oil and gas will increase somewhat over the coming months."

This will lead to higher demand for the company's services.

Gould said that this demand increase would not be "uniform across either geographies or for services by commodity type." Natural gas activity is expected to be weak, citing the lack of an increase in industrial demand for the commodity. He is more optimistic about oil, citing the robust price and the continued long-term deepwater activity.

The Bottom Line
Executives in the energy industry have a long memory and remember the intense cyclical nature of previous downturns in the sector. Investors should pay attention to this perspective and use the knowledge to their benefit. (Learn about factors that affect oil prices in our article, What Determines Oil Prices?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  2. Still More Gains Ahead For Semiconductor Makers
    Stock Analysis

    Still More Gains Ahead For Semiconductor Makers

  3. 5 Oil Stocks To Watch Before Labor Day Weekend
    Stock Analysis

    5 Oil Stocks To Watch Before Labor Day Weekend

  4. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

  5. Finding An Alternative With Currency ETFs
    Stock Analysis

    Finding An Alternative With Currency ETFs

Trading Center