SLB reported a clean 1Q18 EPS of $0.38, beating both Consensus and WR estimates of $0.37 and $0.36. EBITDA of $1,623mm was slightly below Consensus and WR of $1,676mm and $1,631mm. EBIT of $749mm matched Consensus of $750mm but better than our $725mm estimate. Revenue of $7,829mm (Consensus and WR of $7,814mm and $7,756mm) was down 4% q/q led by 7% seq decrease in Cameron topline. Consolidated EBIT margins of 9.6% was in-line with Consensus but a tad better than WR of 9.4% driven by stronger-than-expected margins in Reservoir Characterization, which offset the margin miss in Production. See variance below.
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Excluding $269mm of pre-tax adjustments, BHGE reported an Adj. EBITDA of $617mm (Cons/WR = $615mm/$625mm) and Adj. EPS of $0.09, slightly above Cons and WR = $0.06. Total revs of $5,400mm (-7% q/q) were in line with Cons/WR. In OFS, NAM/Int’l revs were -6%/flat q/q compared to SLB -7%/+1% that also reported this morning. Consolidated EBIT margins of 4.2% were also in line with Cons/WR of 3.9%/4.1%, Digital Solutions and OFS demonstrated best margin performance relative to Consensus. Orders of $5,238mm (0.97x B/B) were -8% q/q and about 5% below our estimate. 1Q share buybacks were $500mm, as expected from disclosures in Form 4 filings at the end of March. BHGE has now completed roughly $1bn out of its $3bn share buyback program. Excluding $108mm of disposal of assets, FCF was a $117mm vs our estimate of $104mm. Everything pretty much as expected. See variance details.
Over the first 2 weeks of April, which is right when energy stocks began inflecting higher, we conducted our 2nd quarterly OFS investor survey. Our OFS sentiment rating fell to 3.5 from 5.2, on a scale of 1-10 (1 bearish / 10 bullish). Obviously extreme bearish sentiment, but this could have corresponded with a bottom in the stocks. See note for detailed results and opinions on all 18 survey questions. Thanks again to all 83 participants!
NOV is indicated down 5-6% this morning after pre-announcing a significant 1Q miss. Given we now see 14% downside to current ’18 Consensus EBITDA (-5% previously) and since the stock has been a big outperformer YTD, gaining 14% vs the OSX up only 1%, we expect shares to finish down more than this today, possibly as much as 10%. Other possible negative read-throughs include FET (PP), OIS (PP), OII (UP) and CLB (OP). Recall, NOV is our Wolverine top short for 1H18. Due to our lower estimates, revising YE18 PT to $31 (11.3x WR ’19 EBITDA) from $33.
We published our 1Q Preview Wednesday night (04/11/18), where we highlighted that we believe the recent energy rally just might have some legs if OPEC continues its supportive oil policies and barring a global recession. As such, we decided to dip our toes in the water by upgrading PTEN to Outperform from Peer Perform, but we still maintain Market Weight for the OFS sector.
PTEN has lagged the group significantly YTD, as the stock is down 16% vs the OSX down 1%. Much of this underperformance can be attributed to the day it reported 4Q17 results when it fell 14% after posting a soft 1Q guide and higher-than-expected ’18 capex. Given this recent underperformance, our preference for US land drilling and PTEN’s SOTP value gap, we are upgrading shares to OP from PP with a new $25 YE18 PT (6.5x WR ’19 EBITDA), up from $21/share as we raise our ’19 EBITDA by almost 20%. See our 1Q preview note for more macro level details and analysis.
Complete investor apathy for OFS stocks despite solid oil fundamentals, admittedly supported by OPEC and Russia policies, and rising geopolitical risk that now has Brent above $70/bbl. Our concern has always been about US shale and OPEC’s potential policy reversal once US oil production began to surge. Now US oil production is swelling, yet OPEC and Russia seem hell bent on pushing oil prices higher at the expense of losing share to the US. But if OPEC doesn’t change its supportive oil policies and markets are able to avoid a global recession, it does seem this rally just might have some legs. We will dip our toes into the water with an upgrade of PTEN but, at this point, maintain our Market Weight for the OFS sector.
In less than a month, Permian basis differentials to both Cushing and Houston have widened sharply. Just three months ago, Midland WTI was trading at a premium to Cushing and at parity as recently as early February. Now it trades at a $6.10/bbl discount (as of Thursday 4/5/18). A similar pattern has played out in the differential to Magellan East Houston (MEH). Midland crude prices went from roughly a $2/bbl discount to Houston in January all the way to a $8.70 discount on Thursday. While downtime at the Borger refinery in West TX has likely played some role (it’s due back online mid-April), the magnitude of the differential’s move strongly suggests Permian oil production growth is once again bumping up on basin takeaway capacity.
$1bn operational improvement by YE19. We are still a bit confused as to the baseline for the $1bn of operational improvements. Is it 3Q17 EBITDA of $163mm, as originally thought, or is the starting point really 4Q17, after which EBITDA collapsed sequentially by almost $100mm? This matters. If it’s 3Q17, the $725mm of annualized cost savings (remaining $275mm more related to share gains) would actually imply an adjusted 3Q17 EBITDA margin of 23.1%, ahead of every other peer’s 4Q17 EBITDA margin (SLB [OP] = 22.5%, HAL [OP] = 19.6%, BHGE [OP] = 12.6%). However, using WFT’s much lower 4Q17 EBITDA of $70mm as a starting point, $725mm of cost savings would imply a more reasonable adjusted EBITDA margin of 16.9%, putting WFT somewhere between HAL and BHGE.
In a Form 8-K filed AMC today (03/27/18), which includes a script and presentation to be used at competitor’s conference tomorrow (03/28/18), BHGE is softening their 1Q18 outlook for TPS margins. However, it sounds as though overall 1Q results will be more or less in line as “other” businesses offset softer TPS margins. Overall, we believe today’s news is mostly neutral for shares as stock weakness last week, where BHGE underperformed OSX by 6%, was likely attributed to some anticipating this news. Maintain OP and $43 PT.
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