Morgan Stanley analysts believe the international oilfield services market is preparing for “lift-off.” Pictured are TechnipFMC surface wellheads on a frac pad in North America. (Source: TechnipFMC Plc)
Investors who equate the international opportunity for oilfield services with the potential suggested by the budgets of U.S. shale producers and certain supermajors, whose capex spending plans are largely flat, may miss out on the broader cyclical upside, warned analysts with Morgan Stanley.
The analysts see international upstream spending on the rise largely driven by national oil companies (NOCs), which they believe will reverse gains in market share made by U.S. E&Ps during the shale revolution. Investors, however, are not yet taking this positive outlook of rising spending into account toward oilfield service stocks, according to a report released by Morgan Stanley Research in early April.
Morgan Stanley analysts see the misconception creating an international opportunity for oilfield service stocks with their top pick being TechnipFMC Plc. Also mentioned were Tenaris, Baker Hughes Inc., Transocean, Borr Drilling, Petrofac, Saipem, Subsea 7, Sembcorp Marine, Samsung Engineering, Larsen & Toubro, Hilong, Nabors, JGC and Modec.
Unlike the U.S. independent E&P companies and international oil companies (IOCs), particularly the European majors which have embraced capital discipline, NOCs are currently spending twice the amount of IOCs, and the Morgan Stanley analysts expect them to outpace the industry going forward.
“International upstream spending started rebounding in 2018, and we expect it to accelerate, adding more than $10 billion to global spend by 2022,” Morgan Stanley analysts said. “Most of this opportunity is outside of shale, highlighting the opportunity in international markets.”
Further, the evidence is growing that the offshore, Middle East/North Africa (MENA) and LNG markets are recovering. Highlighting Exxon Mobil Corp., the analysts also noted that internationally-focused E&Ps and some IOCs are also spending more.
The analysts think the upside from the international oilfield services market could be about 30%, based on previous cycles, and that this market is preparing for “lift-off.”
“The market’s focus on IOCs as a proxy for the industry ignores NOCs, despite 2018 spend of $210 billion and 33% of global upstream, twice the share of IOCs, which accounted for 18% of global upstream spending,” Morgan Stanley analysts said. “We expect aggregate NOC spending growth of approximately 4%/$4 billion to 2021.”
The analysts forecast NOCs upstream spending growth of 18% between 2018 and 2020, and a 23% boost from international E&Ps for the same period.
Nor are supermajors, consisting of Exxon Mobil, Equinor ASA, Royal Dutch Shell Plc, BP Plc, Total SA and Chevron Corp., excluded from forecasts for growth. For upstream alone, the supermajors’ capex growth is significant for all six.
Morgan Stanley estimates, based primarily on company guidance, are “for group and upstream specific capex at these six companies to grow at an aggregate 4% to 2021 [1% to 2% excluding Exxon].”
Key to this perspective is the fact, as the analysts note, that NOCs hold the largest share of oil production and reserves—producing more oil and gas than supermajors, E&Ps and midcaps combined.
“Going forward, expectations are for NOCs to take a larger share of reserves, reversing U.S. E&Ps’ gains from 2008 to 2024,” Morgan Stanley analysts said.
The majors, however, are spending less, after peaking in 2015 at 24% of upstream spending. Currently, the majors’ share is at 18%.
The report notes that IOCs are expected to remain “material, especially for the subsea, LNG and drilling markets.” NOCs are the drivers of jackup drilling, and they still represent 25% of subsea spend, with international E&Ps contributing about 20%.
European oilfield service stocks that involve international work still haven’t recovered from the downturn, so the analysts see “the majority of the cyclical multiple expansion still ahead.”
U.S. oilfield service providers also are still underperforming oil prices and producers. They are 121% below the U.S. market and 56% below the European market since the beginning of 2014. Further, P/BV (share price divided by book value) is just 10.5x for European oil service providers, despite the 2018 increase in crude prices, while for the U.S. players it is “close to all-time lows.”
Offshore action internationally offers opportunity, but LNG may be the biggest factor.
“We see the earlier-than-expected volume of LNG projects as the catalyst that accelerates the tightening of the global supply changes,” the analysts said.
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