July 20, 2017 / 4:29 AM / a month ago

U.S. oil service results to top last year as investors eye margin outlook

Various Halliburton equipment being stored at the equipment yard in Alvarado, Texas June 2, 2015.Cooper Neill

HOUSTON (Reuters) - U.S. oilfield service companies' second-quarter earnings should easily top last year's depressed results, but a near 15 percent slide in oil prices since January has weakened the outlook for the second half of the year.

Earnings for suppliers of land drilling rigs, tubing and hydraulic fracturing services in North America, where expanding shale production is driving revenue, are expected to improve over a year earlier. However, international and offshore operations continue to be pressured by low oil prices, analysts and consultants interviewed by Reuters said.

Producers who set their 2017 spending plans when oil was above $50 a barrel could put the brakes on second-half expenditures, crimping the oilfield sector's ability to raise prices, they said.

Schlumberger NV, the largest oilfield service company by revenue, and Halliburton Co are expected to swing to profit in the quarter from year-earlier losses. Schlumberger should post a profit of 30 cents a share when it reports Friday, from a loss on severance and other costs of $1.56. Halliburton is expect to report a 17 cents a share quarterly profit on Monday, from a loss on charges of $3.73 a year earlier, according to forecasts compiled by Thomson Reuters.

"Fracking prices have gone up. Drilling rigs have gone up, so the quarter ought to be good for service companies," said Mike Breard, an analyst at Hodges Capital in Dallas.

Baker Hughes, which became the second-largest oilfield service company following its merger this month with General Electric Co's oil and gas equipment and services unit, is forecast to report a per share loss of 13 cents.

Quarterly results for oilfield companies overall should get a lift from cost-cutting and greater activity. Crude in the second quarter averaged $48.15 per barrel, a 5 percent gain over a year earlier and oil producers increased production, adding 506 onshore rigs in the past year, according to Baker Hughes.

Investors could overlook the earnings gains if outlooks for margins in the next two quarters are lower than expected. Producers entered the year expecting to see oil continue to climb into the mid-$50s a barrel, not slip to the mid-$40s.

"The focus now will be more about margins than market share," said Jonathan Garrett, a research director at Wood Mackenzie. Last year, many service companies ran at cost to generate cash flow and keep as many clients as possible. "We're looking to see if they can successfully offer price increases," he added.

Companies offering high-demand services such as pressure pumping to hydraulically fracture wells and supplying sand are best positioned to benefit from expanding rig counts.

Frack sand company Hi-Crush Partners is anticipated to report a per share profit of 12 cents versus a loss of 26 cents last year.

Wall Street has been cutting target share prices for many oilfield services firms, expecting producers to pull back on capital spending.

"We haven't seen any downward revisions to company plans, but that could happen if oil prices continue to be choppy," said Sajjad Alam, an analyst with debt ratings firm Moody's.

Reporting by Liz Hampton; Editing by Cynthia Osterman

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