Oilfield Services Stocks Show Resiliency
(The views and opinions expressed in this article are those of the attributed sources and do not necessarily reflect the position of Rigzone or the author.)
To borrow some expressions from the world of boxing, oilfield services (OFS) stocks this past year have sustained “body blows,” demonstrated that they are “down but not out,” and have become “contenders” in terms of market capitalization. Such is the message that one of Rigzone’s regular oil and gas market-watchers conveys, and he even uses some boxing terms of his own. Read on for his perspective, along with other insights about recent market developments.
Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?
Tom Curran, Senior Energy Services and Equipment Analyst in Equity Research, B. Riley Securities: This latest rally took the PHLX Oil Service Sector index (INDEXNASDAQ: OSX) to its highest close since late-February 2020, before industry demand was knocked to the canvas by the devastating one-two punch of COVID-19 and the brief, but brutal, Saudi-Russo oil price war.
As a reminder, this rally is the second of a primary uptrend – higher bottoms and higher tops with each rise and then pullback of 10% or greater in the OSX – that began back on October 28. The first rally lifted the index a record 107% over 53 trading days, ending an OSX close of $54.40 on January 14. It gave way to correction that was relatively benign by historical standards, in terms of both depth and duration. The OSX fell 14% over eight trading days to $46.63. So far, this second lifted the index to a closing high of $58.80, which it reached on March 1. So, what do these moves mean? That oilfield services (OFS) stocks have not only reclaimed “investability” status but enjoy among the most resilient and bullish sentiment in the market at the moment.
Barani Krishnan, Senior Commodity Analyst, Investing.com: The one expectation which no one had was seeing a crude build of more than 21 million barrels. Some people were expecting a seismic shift in the U.S. Energy Information Administration (EIA) dataset from the impact of the mid-February snowstorm on Texas refining. To me, this was more of an Armageddon, considering its sheer takeout on Texas refining. U.S. refining capacity itself fell to a record low of 56%. That's enormous.
The other major surprise was the Saudis opting not to do a production hike in April, effectively extending for a third month their original intent to cut a million barrels per day just for February and March. What surprised most me was seeing the Russians and Kazakhs going along with the Saudis for a puny 150,000-barrel per day (bpd) hike each, instead of the much-ballyhooed minimal hike of 500,000 bpd.
Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: OPEC holding production steady was a surprise. Tightening inventories while some of the world is still locked down is likely more politically acceptable, though. With large populations still not feeling the increased fuel cost it allows OPEC to draw down inventories from relatively inelastic buyers that kept consuming during the pandemic. As areas continue to open up, and North Americans look at summer gasoline prices, the push back to continued cuts could be extreme so they may want to make as much progress as possible on inventories prior.
Tom Seng, Director – School of Energy Economics, Policy and Commerce, University of Tulsa’s Collins College of Business: Oil prices rose this week on a convergence of mostly bullish market indicators. A "head fake" by OPEC this week has sent crude prices to their highest levels in 14 months despite a record-breaking inventory increase. Brent has crested the $69 mark while WTI has breached $66 per barrel on a "non-decision" by the oil cartel while some U.S. states look to fully re-open, possibly spurring new demand for petroleum products. The stimulus package has passed the U.S. House of Representatives and is now being debated in the Senate. Meanwhile the Johnson & Johnson single-dose vaccine was given emergency approval and has already been distributed to several states, adding further optimism about containing the virus.
The OPEC+ meeting this week was expected to result in an increase in output by the group of about 500,000 bpd while Saudi Arabia would resume its own self-imposed 1 million-bpd cut. The end result largely kept the status quo, with Russia and a couple of other non-cartel members making slight increases.
The EIA Weekly Petroleum Status Report showed a massive, 21.6-million-barrel inventory increase vs. an American Petroleum Institute (API) report showing a 7.4-million-barrel decline. At 485 million barrels, inventories have risen to 3% above the 5-year average for this time of year. The main reason for the huge surplus was refinery utilization plummeting 56% to 9.9 million bpd, down 2.3 million bpd from the prior week on the weather-related outages from the prior week.
Naturally, the production of refined products fell, resulting in bullish draws from those inventories. Total motor gasoline inventories decreased by 13.6 million barrels and are now at 3% below the 5-year average for this time of year. Distillate inventories fell 9.7 million barrels to 2% below the 5-year average. Refineries will be playing "catch-up" for the next few months to prepare for summer demand while, at the same time, they will need to perform routine maintenance and go into turnaround for summer-grade gasoline blending. Crude oil stocks at the key Cushing, Okla., hub were up 485,000 barrels to 48 million barrels, or 63% of capacity there. U.S. oil production was recovering from the storm-related outages last week, increasing from 9.7 to 10.0 million bpd but far below the record-high 13 million bpd last year at this time. Imports of oil were 6.3 million barrels last week vs. 4.6 million the prior week.
The Dow, S&P and NASDAQ are all poised for losses on the week as US bond yields continue to increase, even as the widespread distribution of the various vaccines should be positive for growth. The U.S. dollar rose this week but did not result in its normally bearish impact on oil prices.
Natural gas prices are lower this week as a less-than-expected storage withdrawal is coupled with moderating temperatures for most of the U.S. The EIA's Weekly Natural Gas Storage Report showed a withdrawal of 98 billion cubic feet (Bcf) vs. expectations for a drop of 134 Bcf last week, leaving stored natural gas at 1.85 trillion cubic feet – which is now 13% lower than last year and 9% below the 5-year average after the massive drawdown from two weeks ago. Supplies of natural gas were also recovering last week as they rose to 91.1 vs. 82.7 Bcf per day (Bcfd) the prior week. Total demand last week was 106 Bcfd, down from 116 Bcfd the prior week, with residential usage falling the most. Exports to Mexico increased to 5.5 Bcfd while exports of LNG rose to 9.8 Bcfd from 7.4 Bcfd the prior week.
Rigzone: What were some market surprises?
Curran: Two of the industry’s most respected, influential leaders shared dissentingly optimistic views on U.S. E&P behavior over the rest of 2021. Since last December, conventional wisdom has held that U.S. shale operators will limit capex budgets solely to “maintenance,” meaning they’ll spend just enough to keep production flat with its 4Q2020 peak or 2020 exit level and sustain a poker face – at least this early in the year – about if and under what conditions they might step up activity.
Yet, during Liberty Oilfield Services’ (NYSE: LBRT) earnings call on February 5, Chairman and CEO Chris Wright said:
On the private side...oil prices and current economics impact decision-making, so there's a little more movement in plans. But even their capital availability isn't great. Nobody wants to stress a balance sheet. So, as the cash flow flows up, I think you'll see a little more capex from the privates ... We're already seeing a bit of that.
Seventeen days later, on Solaris Oilfield Infrastructure’s (NYSE: SOI) own call, Chairman and CEO Bill Zartler echoed Wright’s perspective on private E&Ps and then expressed a similar expectation for public producers as well. Zartler said:
I think we've seen folks more interested. It's a little bit of a spread between the publics and the privates. But even the large guys are looking at this price deck and what may have been a 2022 completion plan, it may be moving up to 3Q21 and 4Q21 and it really depends on what happens with pricing here ... I think commodity prices have gone up a little quicker than certain people thought they would. And so, it's raised eyebrows in some of the big guys that have really had plans to be very ... steady...for this year. That, incrementally here, it may make some sense to add something in 2H21 versus in 2022.
Krishnan: Last week’s crude build truly stands out to me. At more than 21.5 million bpd, it eclipsed even the 19 million bpd-plus hike that we saw in the first week of April last year, at the height of the destruction to oil demand from the COVID-19.
The other surprise, of course, was how Russian Deputy Prime Minister and de-facto Oil Minister Alexander Novak could become so beholden to his Saudi counterpart Prince Abdulaziz bin Salman, who is once again relishing his role as a market spoiler for oil bears.
Abdulaziz and his half-brother, Saudi Crown Prince Mohammed bin Salman, were the architects of the Kingdom’s decision in January to volunteer 1 million bpd in Saudi output cuts. This was on top of existing production control commitments Riyadh had made to OPEC+ since April last year to shore up collapsed crude prices in the aftermath of the COVID-19 outbreak.
Many analysts are debating how long the Saudis can continue making such cuts and risk losing their market share to more aggressive U.S. oil exporters, who aren’t a part of OPEC+. The United States was the largest crude producer in the world up until the COVID-19 outbreak, turning out a peak of 13.1 million bpd. U.S. crude production has fallen drastically to just around 10 million bpd since, but it can rebuild both output and exports if prices continue to rise. It remains to be seen what the Saudi game will be going forth.
Le Dain: Turnarounds on large oil sands assets are expected, but it’s interesting to see in Canadian releases by Suncor (NYSE: SU) and Canadian Natural Resources (NYSE: CNQ) that they will be taking a combined half a million barrels a day off the market for maintenance shortly. Another supply gap, especially for an already tight market for heavies.
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