2011 In Review: Energy Services Come Up Short

By Stephen D. Simpson, CFA | December 29, 2011 AAA

There's arguably no such thing as a dull year in energy. In 2011, oil prices broke out over $110 in the late spring, only to ultimately bottom out below $75 in mid-fall before recovering back in the $90s. Although natural gas prices did break above $5 early in the year, most of the year has seen a steady erosion in prices and is close to flirting with the $3 mark.

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With the market apparently flooded with natural gas, it is perhaps no great surprise that energy service companies have not been so strong in 2011. Although overall activity has not dropped as much as in prior "bad years," Wall Street has nevertheless seen fit to move these stocks down by about 10% on a sector-wide average.

A Rebound Close to Shore
With the BP (NYSE:BP) oil spill wrecking oil activity in the Gulf of Mexico in 2010, many Gulf-oriented offshore operators came into 2011 with relatively low valuations and low expectations. Consequently, a lot of the notable winners in energy services (among those with more than micro-cap valuations) came from this general category.

Hornbeck Offshore (NYSE:HOS), Gulfmark Offshore (NYSE:GLF) and Helix Energy Solutions (NYSE:HLX) managed to post positive year-to-date returns of almost 50%, more than 30% and more than 20% respectively for 2011. Don't assume that this is due to great financial performance, as year-to-date revenue growth has been modest for Gulfmark and actually negative for the other two.

Other Winners
Both Carbo Ceramics (NYSE:CRR) and Core Laboratories (NYSE:CLB) have also delivered solid market returns this year, with both up in the mid-20% area. Broadly speaking, both companies are in the business of helping oil and gas producers get more out of their reserves, with Core focusing on reservoir analysis and production enhancement, while Carbo Ceramics specializes in materials used in the hydraulic fracturing process. Both companies have shown solid revenue growth in a market when growth has been more challenging. (For related reading, see What Determines Oil Prices?)

Tough Times at the Big Three
There is no doubt that Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) are the 800-lb gorillas and bellweathers of the energy services space. If times are good, they do well. If times are bad, they do poorly. To that end, it's no great surprise to see Baker Hughes down almost 20%, Schlumberger down a similar amount and Halliburton down slightly more. Although activity in North America has been fairly strong, demand elsewhere has been more problematic, due in part to the unrest of the Arab Spring, but also delays in getting projects underway and uncertainties tied to the global economy.

Rough Waves in Deepwater
There are plenty of quality operators in deepwater operations that haven't done so well this year. SeaDrill (Nasdaq:SDRL) has eked out a tiny gain so far this year, but Transocean (NYSE:RIG) shareholders have had a rotten year and seen worse than 30% erosion in their holdings. Even quality undersea equipment plays like National Oilwell Varco (NYSE:NOV) and Cameron (NYSE:CAM) have given ground this year, down about 1% and 8% respectively.

The Bottom Line
It looks like 2012 will be a market where the details really matter. For instance, can anyone feel too confident about North American drilling and production activity if natural gas prices keep skidding? Sure, some producers will drill just to hold on to leases, but it's hard to justify more expensive wells at these prices. On the other hand, international and deepwater markets could be readying for the rebound. (For more on natural gas, see Natural Gas Industry: An Investment Guide.)

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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

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