[Editor's note: This story appears in the May 2020 edition of Oil and Gas Investor. Subscribe to the magazine here.]

Stretch a rubber band too far, and it breaks. Snap! The pieces ricochet right back to sting your face. So here we are. Lower for longer eventually will lead to stronger for longer—but only for the survivors. For these, this slump of rare proportions could be the opportunity of a lifetime.

Everyone is looking for the silver linings.

Would that be vastly lower service and supply costs? Rystad Energy said recently that in the last downturn (2014 to 2016), oilfield costs fell about 37% overall, 45% in shale plays and up to 40% offshore. That silver lining is not apt to be as easily found this time around because most cost reductions along the supply chain have been exhausted.

What about a recovery time frame? For industry and the wider economy, it will take several quarters, probably years. Oil demand will follow—or, will it? We took heart seeing the vast flow of cars, trains and celebrations in Wuhan, a city of 11 million people where the virus started its deadly sweep across the globe. We hope it’s not going to have been a false start by the time
you read this. 

But there could be another consequence. On the environmental front of World War C, vehicular and factory activity has dropped precipitously—but water and air pollution from carbon emissions has too. The canals in Venice are so clear that we can now see the fish swimming in them. Who knew? The sky in Beijing turned blue. Pollution haze above Los Angeles highways is gone for now.

Consumers see in the most dramatic way possible how reduced oil use makes such a big difference. This is going to turn a lot of assumptions on their head and further encourage the already widespread moves by governments to wean their economies off fossil fuels in the coming decades.

In the near term, as Jim Wicklund, managing director at Stephens Inc., said: “The business is not going away, but it is going to have a difficult 2020 and 2021.”

It’s hard to figure which sector is hurting the most, E&Ps or service companies—or which has become a screaming Buy. But on April 6, one brave soul said it is time to jump into oilfield services. Nicholas Green, senior research analyst for Bernstein, issued this call: “We started covering the space in 2014. We’ve never been bullish, even in the depths of ’16. Yet expectations have dropped far too low—for the first time in seven years, it is time to buy!

“As committed bears, we do not upgrade lightly.”

The market has priced in annihilation, which is misguided, and thus we see a major opportunity, he said. Green said he duplicated his models seven times to be sure, involving over 200 separate sector and company models. That research indicates to him that numerous top-tier service companies will survive and some have “material upside even in a $30 flat world.” He also ran the models at $40.

His scenarios indicate this: Yes, EBITDA will be crushed by as much as 50%. But the majority of names will be able to show free cash flow; balance sheet distress is limited to an unlucky few.

Bottom line, he finds average upside of 60% to his Buys at $30 flat.

He named seven outright winners: Baker Hughes Co., National Oilwell Varco Inc., Tenaris SA, SBM Offshore, Subsea 7 SA, Saipem SpA and Hunting. He also advised that investors take a position in the “dividend-cut crew” that are admittedly risky, but with the dividend cut being the signal to jump in. These names include Schlumberger Ltd., TechnipFMC Plc, Helmerich & Payne Inc., Wood Plc. and Petrofac Ltd.

On his watch list, ranked as Market perform, are Halliburton Co., Core Lab, Oceaneering International Inc. and Patterson-UTI Energy Inc. Each faces risks but upside is possible.

What about E&P ideas? Morgan Stanley likes Chevron Corp., ConocoPhillips Co., Noble Energy Inc., Hess Corp., Pioneer Natural Resources Co. and Cimarex Energy Co. Bernstein cited ConocoPhillips, Hess and EOG Resources. Non-Texas-oriented midstream companies might be worth a look, it added. Roth Capital Partners rated all E&Ps neutral. Analyst John White suspended price targets and earnings estimates for the names under coverage until they revise their guidance.

All analysts emphasize companies with good assets, a strong balance sheet and hedge position, and credit strength, or companies that can afford to keep paying at least some of their dividend without borrowing—or cut them altogether in order to pay debt instead.

Silver linings may be further in the future. WTI could reach $55/bbl again in 2022 once demand stabilizes, the economy revives and oil inventories are drawn down. Meanwhile, analysts see U.S. production shut-ins ahead.

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