Oilfield services companies like Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) recently reported their Q3 earnings and their stock prices have dropped. However, this doesn’t mean it’s a good time to sell your shares. These companies are part of a global supercycle, which means they have several more years of growth ahead. The drop in stock prices is mainly because their Q3 results were not as strong as what analysts expected. The important thing to understand is that the market had already factored in strong short-term performance, and now analysts are adjusting their expectations for Q4.
This adjustment in expectations actually sets the stage for these stocks to potentially rally later in the year. In the words of Schlumberger CEO Olivier Le Peuch, “We believe the market fundamentals are still very favorable for our business. The oil and gas industry is benefiting from a multiyear growth trend, especially in international and offshore markets where we are the leading company.”
Positive News for Investors in Oilfield Services Performance
The recent results from SLB and HAL might not have surpassed the expectations set by Marketbeat.com, but it’s important to note that those estimates had been on the rise for several quarters. What investors should pay attention to are the positive aspects. Both companies are still experiencing solid revenue growth in the low-double-digits, and their profit margins are getting better. They’re doing well in all regions and business segments, with a noticeable increase in their international operations during the last quarter.
Even though SLB and HAL didn’t meet the revenue expectations, it wasn’t a significant miss, and they made up for it with strong bottom-line performance. Both SLB and HAL exceeded the consensus estimates for their earnings, showing growth when compared to previous quarters and the same period last year.
Halliburton CEO Jeff Miller expressed his confidence in the ongoing positive trend in the industry, saying, “I’m increasingly convinced that this upswing will last a long time. Given this, we anticipate a continued increase in the demand for oilfield services in 2024 and beyond.”
While the outlook for growth is strong, what’s really going to support the upward trajectory of oilfield stocks is the cash flow and free cash flow (FCF). Not only are profits and profit margins expanding, but FCF is also getting better. This improvement allows companies to buy back shares, pay dividends to shareholders, and reduce their debts.
Companies now have a lot more cash in their bank accounts compared to last year. This suggests they might consider increasing their dividend payments to shareholders. Among these companies, Baker Hughes currently offers the highest dividend yield. They managed to keep their dividend payments steady even during the pandemic. On the other hand, Schlumberger and Halliburton reduced their dividends during that time, but they have plenty of room to increase them.
To get back to the dividend levels they had before the pandemic, Schlumberger’s dividend could potentially grow by as much as 100%, while Halliburton’s could increase by 12%.
When it comes to buying back their own shares, Schlumberger used $0.151 out of every $1.04 billion they generated in free cash flow for this purpose. Halliburton also bought back $200 million worth of shares. Looking at their expected revenue and earnings, it’s likely that both companies will continue buying back shares in a steady manner for the foreseeable future.
Baker Hughes Prepares for Earnings Announcement: Analysts Raise Expectations for Oilfield Company Stocks
Baker Hughes (NYSE: BKR) is going to announce its earnings before this month ends, and the results are expected to be somewhat similar to what we’ve seen before. The catch is that analysts have had time to adjust their expectations for the third quarter, and they might have set the bar lower, making it easier for the company to show some relative strength.
Nevertheless, Baker Hughes is anticipated to maintain growth in the range of 20% with better profit margins. In this situation, analysts are likely to keep raising their target prices for BKR stock, much like they did after Schlumberger (SLB) and Halliburton (HAL) reported their results. All three companies are rated as “Moderate Buy/Buy,” and their target prices are on an upward trend for 2023, suggesting the potential for reasonable to decent double-digit gains.
Technical Analysis: Upward Movement in Oilfield Services
The VanEck Oilfield Services ETF (NYSEARCA: OIH), which has its major holdings in SLB, HAL, and BKR, making up 40% of the portfolio, is on an upward path. Although the ETF is currently experiencing a slight pullback, it’s in line with the overall trend and still above a crucial support level. This significant support level is located around the long-term moving average, near $320, and when it’s reached, we can expect a strong rebound in the market.
However, if this support doesn’t hold, the market may drop to lower levels, providing an opportunity for better value and returns before it resumes its upward trend. In the long run, it seems like this market is changing direction and is poised to see significant gains over the next few years.
