EQUITIES
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ENERGY EQUIPMENT & SERVICES
13 January 2019
Oilfield Services – important soundbites and key numbers
Our oil price view remains constructive for oilfield activity, despite our revised lower
framework – our assumptions for Brent are USD64/b for 2019e, USD70/b for 2020e and
USD70/b for 2021e onwards. This is a key input into our view on the OFS space.
The IOC (free) cash machine continues – over 2019-2023e we see the IOCs under our
research coverage generating cumulative operating cashflow of USD1,163bn and free
cashflow (pre dividends) of USD502bn; this compares to free cashflow (pre dividends) of
USD211bn over the prior cycle in 2010-2014.
We forecast combined IOC capex in the range of USD135-141bn by 2021-2023e, up
roughly 30% versus 2017-2018; the IOCs do not dominate global upstream spending but
they do for offshore, especially deepwater (where we see a gradual but robust outlook).
We see attractive upside across much of the oilfield value chain – we see on average
35% upside to our target prices for the ‘Big 3’, and a substantial 70% upside for offshore
drillers; we see less opportunity with the subsea-exposed names.
Our revised assumptions in this report continue to place us below consensus – on
average, our target prices for the ‘Big 3’ are 11% below the street, and we’re 20% below for
the subsea names; our target prices for the offshore drillers are 15% above the street.
Good bottom line and cashflow growth from the oilfield value chain – over 2018-
2020e we see 25-30% EBITDA growth and 40-60% EPS growth from Schlumberger,
Halliburton, Wood Group and Weir.
‘Big 3’ free cash flow a key strength – on our numbers, we see free cash flow (FCF)
generation from Schlumberger, Halliburton and Baker Hughes GE totalling USD21bn over
2019-21e. This is now 15% below the level we forecast three to four months ago, but is still
equivalent to 23% of the current market capitalisation; FCF is included in executive KPIs at
Schlumberger and Baker Hughes GE.
OFS valuations at attractive levels – on our revised numbers, the diversified OFS/
OFS-exposed names – Wood Group, Halliburton, Weir – are on 10x 2020e EPS and
Schlumberger on 15x 2020e.
Dividends offering selective support – post the Q4 2018 sector de-rating, some names
have dividend yields in the 4-5% range for 2019e; we note Wood Group and Schlumberger
offer around 5% (in a sector usually not well-known for dividend support).
Middle East & Asia more important than the US for SLB – we still forecast
Schlumberger and Halliburton on a geographic as well as divisional basis. Based on this, in
terms of EBIT growth 2018-20e, we see 25% coming from North America for Schlumberger
(and 65% for Halliburton), but around 40% from the Middle East/Asia for Schlumberger (and
17% for Halliburton). Our changes in this report (lower oil price effect on short cycle
businesses) have shifted this balance; before we saw 40% of EBIT growth from North
America for Schlumberger (and 70% for Halliburton).
Subsea suffers from oversupply – our own work on the installed asset base and SURF
(subsea umbilicals, risers and flowlines) fleet shows little change now versus that in 2013-
14; this has important implications for the likely speed of price and margin recovery.
But the best parts of offshore drilling are increasingly concentrated in only a few
hands – based on current rig fleets, post announced or planned consolidation, we see
c.60% of 7th generation floater rigs in the hands of three players (Transocean, Seadrill, and
the combined ESV/RDC), c.60% of harsh environment floaters with four players
(Transocean, COSL, Diamond and North Atlantic Drilling), and c.60% of harsh environment
jackups with two players (combined ESV/RDC and Maersk Drilling).
A lower but still supportive
oil market backdrop for
oilfield activity
A supportive cash flow
environment from the big
customers
We see oil capex up around
30% by the early 2020s vs
2017/18