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How attractive are companies from the drilling sector?

Prologue


The cost of “black gold” brands Brent and WTI has been steadily above $90 per barrel for more than six months, which allows oil producers to earn record profits. We believe that oil stocks have almost fully recouped the rally in oil. However, we think that oilfield service companies will take over their alpha from producers, as this is a bet on a long-term trend. Despite the fact that the global economy may slip into recession in Q4. 2022 – Q1 2023, and the price of oil, according to our forecasts, will drop to $77, this is still above the break-even point of oil producers. In this regard, we decided to figure out what to expect from the oilfield service industry and who you can bet on.


In the article we will tell you that:


  • a recession is on the verge, but the price of oil will not fall much;
  • the break-even point of oil producers allows not to reduce capex;
  • There are companies to look out for.


A recession is on the verge, but the price of oil will not fall much


A recession is approaching in the US, it may come by the new year. The dynamics of the index of business activity in the manufacturing sector (PMI) corresponds to this.


First of all, we do not expect a significant drop in oil prices even in a recession due to a forecast deficit in 2H 2022 of 0.2 mbs, but by December the deficit could increase to 2.1 mbs if OPEC + does not increase production more.



In the base scenario, we expect that already 4 sq. 2022 will be the first quarter with a decline in US GDP, in 1 quarter. 2023 will be a recession. In this regard, we expect that in the 4th quarter. 2022 oil price will drop to $77/bbl.







3Q22

4Q22

1Q23

2Q23

old forecast

124

142

100

77

New forecast

100

77

80

100



The break-even point of oil producers allows not to reduce capex


However, even if oil prices drop to $77 per barrel, almost all projects in the world remain profitable, according to GS and Statista, with the exception of tight oil production in Canada. Due to the forecast deficit in the industry, as well as the still high profitability of projects, we do not expect drilling demand to fall. And as a result, the average check too.



In this regard, we see that the bet on drilling is a bet on the long-term trend. The number of drilling rigs in the world is expected to reach the level of 2019 by 2024.



The universe of oilfield services companies is diverse. Below we have provided a list of companies traded on the stock exchange. As part of our analytics, we have already placed a bet on one of these companies. Join now!



Conclusion


We believe that the oilfield services sector will be one of the main beneficiaries of continued high demand for oil and a shortage of raw materials. High demand for raw materials allows companies to index the average check from the tower on a quarterly basis. A bet on drilling is a bet on a long-term trend that will not stop within a few years.


We believe that now, amid fears of a global recession, there is an excellent entry point into HAL shares for long-term investors. The company also pays attractive dividends with a current forward dividend yield of 1.2%. To understand the movement of quotes, we recommend tracking the dynamics of drilling rigs in the US from BakerHughes.

About author

Oxford graduate with honors. He worked in large financial projects for well-known Wall Street corporations. After he earned his first capital and a reputation as a successful trader, he opened his own company. At the moment, the growth of the company's capital is 20% per year.
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