Due to the sharp decline in oil and natural gas prices, the downturn in the oil-services industry will be severe, says Mark Urness, analyst at Calyon Securities (USA) Inc.


“We believe worldwide spending and activity levels will contract even more sharply in 2009, both in North America and overseas,” he says. “We are reducing our 2009 earnings estimates across our entire coverage universe by an average of 19%. Batten down the hatches!”


Oil prices below $50 seriously undermine upstream spending plans for 2009, particularly when combined with the far-reaching impact of the financial crisis. He anticipates worldwide E&P spending will fall 15% in 2009, led by a drop of nearly 25% in North America.


Calyon’s previous forecast was for a 6% decline in worldwide spending. It now anticipates the U.S. rig count will fall by between 500 and 600 rigs—much more than the 300- to 400-rig drop that was previously forecast.


This particularly is troublesome for service-company budgets.


“Two months ago, we first lowered our spending forecasts, rig counts and earnings estimates in response to the financial crisis and lower oil and natural gas prices,” he says. “Since that time, oil and gas prices have continued to trend lower, with oil breaking though $50 per barrel, and some pundits saying it could drop below $30.


“Given that the oil-price downturn occurred smack in the middle of the industry budgeting cycle, we believe the shock could prove very troubling for upstream budgets.”


He expects that essentially all discretionary spending plans will be suspended “until the dust settles, which may take some time.”


Stock prices reflect selling as though doomsday is near. The market is discounting as though E&P spending and activity will not recover in the near term. Following the latest round of cuts in producers’ and service companies’ earnings guidance, the service stock Urness covers is trading at 6.7 times estimated 2009 earnings, far below that of the 2001 and 1998 downturns.

Comments