NEW YORK (
) - Has the market reaction to earnings for oil service giant
set the tone for the rest of the sector, with
set to report on Monday?
Shares of Schlumberger opened higher on Friday morning after reporting revenue and earnings above the Street consensus, but the rally fizzled quickly, and by midday Schlumberger shares were down by 1.5%.
was down early in the afternoon on Friday,while Halliburton and
, among the major oil service sector plays, were flat or holding onto marginally positive trading.
Headed into the Schlumberger earnings, the big question was whether the oil service stocks would repeat the third quarter earnings trade, when the stocks reported strong numbers, presented a positive outlook, yet still sold off as event-driven traders booked profits.
Schlumberger presented a picture of its business that was more or less the expectation ahead of its fourth quarter earnings: North America at a peak, yet still strong even if pricing will come down at some point during the year; international activity improving but lacking really specific data points at the present time; and all in all, investors left with the impression that international revenue expectations are being pushed off again and revenue back-end loaded for 2011.
Indeed, with Baker-Hughes and Halliburton more or less flat in trading on Friday, it all raises the question: Can an earnings beat and a broadly positive tone keep oil service shares already near 52-week high levels moving higher, or will event-driven traders book profits, and there be a period of choppy performance before the money in these stocks again consolidates in the hands of long-term investors?
Darren Gacicia, energy analyst at Dahlman Rose, had the opinion coming into earnings that given the big run up in these stocks, unless the companies provided "whoppingly good guidance" it would be tough to drive the shares higher. He noted that it's especially difficult given the level of trading-oriented money involved in these oil service names.
"Everything is positive in terms of where things are headed, but when you watch the tape on Friday after Schlumberger to get a sense for what everybody thinks, and a tone saying that international growth is back-half loaded for 2011, it can serve to push out the next major catalyst," the Dahlman Rose analyst said. It also means that the short-term, event driven trade will tilt to the negative.
Gacicia stressed that the Schlumberger tone does suggest a stronger 2011 -- and, even more importantly, that Street models for 2012 are too low -- but it will take time and more concrete data points for the market to sort this out and for the trade to consolidate around long-term money.
"These stocks aren't going to roll over precipitously, but maybe slide as short-term money exits and experience buying on dips," the Dahlman Rose analyst added.
RBC Capital Markets analyst Kurt Hallead, who remains bullish on Schlumberger with a $105 price target for the next 12 months, called the company's outlook tone "soft" in an interview on
Phil Weiss, senior analyst at Argus Research, said that there was one specific item in the Schlumberger earnings that was a negative and in no way reflects on the other stocks in the sector: the effective tax rate guidance going up from 21% to 24%. In the Argus Research analyst's model, this change in tax rate guidance has an earnings impact of 15 cents per share this year and 20 cents per share next year. The analyst said the higher tax rate guidance appears largely due to Schlumberger's business mix, with its acquisition of Smith International and market activity in North America increasing the U.S. portion of the tax equation.
As to the underlying question about whether the oil-service stocks will again trade as a basket, Weiss said the stocks could be "stuck" until there is more concrete information. However, he thinks the underlying environment is improved and business is doing better than previously thought.
"Oil prices are certainly supportive of additional activity; deepwater opportunities (even if we exclude the Gulf) look relatively abundant. External factors are keeping the natural gas market afloat (at least until around mid-year, we'll have to see what happens after that). I think some of what caused the turnaround on SLB is specific to SLB, but we'll find out more starting Monday when HAL reports," the analyst wrote in an email to
Darren Gacicia, energy analyst at Dahlman Rose, noted that there isn't usually too much variance between the earnings trade in the oil-service stocks. There are, though, some key differences between Schlumberger and the rest of the group.
Baker-Hughes and Weatherford, for example, typically come into earnings with lower expectations. Halliburton was lagging the group this year because of issues related to the Macondo well and the sustainability of pressure pumping, too.
Halliburton is currently trading at just over 14 times 2011 consensus earnings, versus Schlumberger trading at over 21 times consensus earnings. Weatherford International is currently trading at 18 times 2011 earnings, while Baker-Hughes is trading at 17 times 2011 earnings.
-- Written by Eric Rosenbaum from New York.
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