Investors Should Fade GE’s Oil Patch Trade

General Electric

GE -1.07%

is exhibiting unfortunate timing in selling another chunk of its oil-field-services company

Baker Hughes

BHGE 1.57%

A slowdown in the prolific Permian Basin, the center of the shale boom, as well as weakness in crude prices have punished its shares along with those of industry heavyweights


HAL -1.50%



SLB -1.13%

Things may be looking up for investors in the sector, though.

Shareholders can’t be blamed for feeling blue. Last month the International Energy Agency cited a “fragile” outlook for demand partly because of the U.S.-China trade dispute. The agency said global oil demand was up only 520,000 barrels a day in January to May, the lowest increase for the period since 2008. West Texas Intermediate prices are around one-quarter lower than they were at the beginning of the year. The U.S. Energy Information Administration predicted earlier this week that U.S. crude-oil production will average 12.2 million barrels a day in 2019 and 13.2 million in 2020, both records. But booming production doesn’t necessarily equal impressive spending, or even profits. Shale producers are feeling financial strain. They were meant to be the driving growth engine in the market as the short drilling cycle makes them more nimble. More than two dozen U.S. oil-and-gas producers have filed for bankruptcy so far this year, though—almost as many as in the whole of last year. Others are being more cautious about spending as shareholders focus on heretofore elusive free cash flow from the shale patch. Service companies have responded by tightening their own belts. Evercore ISI projects that capital expenditures at Halliburton will be 6.9% and 6.2% of 2019 and 2020 sales, respectively, versus 6.7% and 8.4% in 2017 and 2018. Schlumberger’s similar metric is now 5% versus at least 10% historically. The three biggest servicing companies have different exposure to the U.S. market. The majority of Halliburton’s business is helping fields in North America, whereas Schlumberger and Baker Hughes are only about one-third exposed. The North American figures include some conventional fields.

But there is a bright spot to the conservatism creeping into the shale patch: As shale producers focus on discipline rather than growth, the servicing businesses are steadier, too. Their earnings might look more like an industrial concern rather than a boom-and-bust commodity business—a welcome development for their valuations. In the past, the financial swings in oil field services have been wilder and more punishing than for drillers themselves. Offshore oil drilling, meanwhile, is coming back to life, too, with rig counts and utilization rates increasing from recent lows. Companies are seizing the moment to look abroad. Baker Hughes Chief Executive

Lorenzo Simonelli

recently said at a conference that international offshore was a key focus area. The company grew orders 9% and revenues 6% in the first half of this year versus the same period last year, with international being the strongest. Halliburton recently sold out of equipment in the North Sea. Schlumberger’s international revenue increased 8% in the first half of the year compared with the same period last year while North America land revenue has declined 12%. Halliburton’s shares have fallen almost 50% over the past year; Schlumberger’s are off almost 40% while Baker Hughes’s are down by about one-third. The broader PHLX Oil Service Index is down by about half this year. Halliburton’s price/earnings ratio has been nearly halved since late January, according to FactSet. Schlumberger’s similar figure is down by almost one-third. If the business is becoming less boom and bust, though, then investors have fallen victim to a slippery slope. Write to Lauren Silva Laughlin at Corrections & Amplifications Baker Hughes grew its orders 9% in the first half of 2019. An earlier version of this article incorrectly stated the company grew its offshore orders 9% in the first half. (Sept. 12, 2019)

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