Bellwether or sack of potatoes?

Author Toby Shelley

The earnings season looms. BP and Total report on 28 April with the other big players following in short order.

The earnings season looms. BP and Total report on 28 April with the other big players following in short order.

Ahead of the big oil companies come the big global service companies — Schlumberger later this week, Halliburton, Technip next week. They take the brunt of oil industry capex cuts, project deferrals, rate cuts and redundancies, and the order books and outlooks in their earnings reports can provide an insight into their clients’ market expectations. To that extent, they are a bellwether.

But there may not be much in the way of guidance from the service companies this time round. Deutsche Bank says the down cycle for European service companies preceded the fall in oil prices, so to make any sense of their performance requires disentangling cyclical from structural issues. The bank adds that US onshore economics, “Opec behaviour” and geopolitical risks all make the medium-term outlook for crude hard to call. This point was echoed in the editorial in today’s IEA report that pretty much admitted that the OECD energy watchdog doesn’t know what’s happening with either demand or supply. Midsize London-listed Hunting — market cap of around £850mn — seems pretty much of the same mind, saying in a trading statement today: “While the current outlook for trading in the remainder of 2015 and into 2016 continues to be unclear, the board remains of the opinion that capital investment and activity levels in the industry will recover, as and when the supply-demand balance across the industry is resolved.”

Nonetheless, Deutsche Bank tentatively proposes that many service companies will see their financial performance bottom in the next 12 months on improvement in oil market fundamentals and the outlook for upstream capex, among other factors. One of those other factors is consolidation in the service sector, something that Swiss bank UBS acknowledges is often discussed but argues faces major hurdles, including the high degree of existing concentration in many parts of the industry and client resistance.

Concentration there is in parts of the service sector — UBS cites sub-sea installation — but perhaps the overarching characteristic is its very lack of uniformity. Karl Marx likened the French peasantry to a sack of potatoes, meaning it had no coherence as a class. Service sector companies are so differentiated in their activities and the location of their operations that comparison is difficult, inviting comparison with the peasantry of the 18th Brumaire. This is reflected in the performance of their share prices over the past year. The share price of Transocean — primarily an offshore drilling company — has taken a hit of almost 60pc while greatly diversified Schlumberger has fallen by under 10pc, but Halliburton’s price is off by almost 20pc (though part of that is down to its acquisition of Baker Hughes).

Nonetheless, the results statements will be picked over carefully well beyond the shareholding fraternity, not for the profit figures — which will be uniformly “soft” — but for indications of what is really happening on the ground in the US shale regions, deep offshore, in the market share defenders of the Mideast Gulf.

For more information, please contact OilBlog@argusmedia.com

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