Integrated Services Could See Revenues Rise 10% In 2013, Analyst Says

By most measures, North American integrated services seem destined for the doldrums in 2013, but research by Bernstein Research suggests onshore revenues could rise by up to 10%.

The outlook for services appears to be stronger than land drillers, said Scott Gruber, senior research analyst, U.S. Oil Services and Equipment, for Bernstein & Co. Gruber was the lead author of a Jan. 11 report, “U.S. Oil Services: Land Ahoy!”

“The key conclusion is that services revenues should rise,” Gruber said, noting that revenues are driven by frac-stage count (pumping, perforating and coiled tubing) and well count (drilling tools and services).

Gruber said frac-stage count growth will outpace well and rig counts, thanks to efficiency improvements. More complex U.S. fracs executed on horizontal wells should rise by 12%. That’s slightly less than the well count in the Bakken, which has the largest number of stages per well but is losing share.

Bakken share gains should reverse as drilling stagnates and activity in other basins expands, Gruber said.

Though material improvement in frac pricing is still off the radar, revenue growth should drive domestic income up, he said. “Coupled with continued double-digit growth abroad, we believe the integrated services are the most attractive subsegment within our coverage universe,” Gruber said.

Gruber rates Baker Hughes (NYSE: BHI), Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) as “Outperform.” Helmerich & Payne Inc. (NYSE: HP), rated “Market Perform,” and has an estimated earnings per share of $5.16 for 2013.

“Service revenues have long been rising faster than rig count given improvements in rig efficiency, a shift toward horizontal drilling and expanding stage counts within shale wells,” Gruber said.

As horizontal activity continues to take share in the United States, the total number of frac stages executed in the U.S. should rise by 10% during the next 12 months, Gruber said.

E&P spending power is also increasing as well costs drift down another 5% in 2013. Spending power combines spending capacity in terms of cash available and well costs.

As a result, Gruber predicts a 7% rise in well count during the next 12 months. Given the mix shift toward horizontal activity, horizontals wells should be up 15%.

Innovation is also paying dividends.

“Our recent analysis of rig efficiency gains in the U.S. reveals clear improvement within the horizontal fleet at about 8% more wells per rig per year,” Gruber said.

However, the shift toward more horizontals impedes the overall rate of efficiency improvement for the fleet, since horizontal wells are more time consuming than vertical wells. Overall, rig count growth should trail well-count growth. Year over year, rig count should be down 4% averaging 1,844 in 2013, with the horizontal count flat at 1,153, Gruber said.

Source: Bernstein Research