If you want to be up to date with what's going on in the oil and gas industry, listening to Halliburton's (NYSE: HAL) quarterly conference calls is a great place to start. As one of the largest oil and gas service providers out there, management has a lot of insight into where the market is going that can help inform your investment thesis. This past quarter was no different. Here are five things management said that anyone with an investment in oil and gas should mull over.
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More than anything, investors want management teams to have a decent idea of what the market for their products and services looks like, and to be able to make good on promises. Well, after promising that 2017 would be a good year for the company, CEO Jeff Miller got to brag a bit during the company's spectacular third quarter as many of his earlier predictions and promises came through:
One thing in this statement worth keeping track of is Halliburton's comment that it is taking market share. Schlumberger (NYSE: SLB) said it was also taking market share in North America. These are two of the three largest oil services companies in the world with extensive North American presences already. One has to wonder how much more market share either can capture.
Market finally swinging in favor of oil services, at least in North America
Over the past couple of years, it has been a producer's market regarding hiring oil equipment and services providers. There has been so much idle equipment out there that companies have been more than willing to take lower rates to keep assets working. In 2017, though, that has started to change as equipment inventories and available work crews have dwindled. As a result, pricing has begun to swing back in favor of the service providers, which Miller says is going to allow Halliburton to raise prices and juice returns:
The wave of sand is cresting
Frack sand producers have been banking on a significant uptick in demand next year and have been investing heavily in new mines. According to most sand producers, demand in 2018 will be somewhere in the 90-100 million ton per year range. Miller seems to think otherwise:
There is a lot to unpack in this statement for frack sand producers. One is that perhaps all of this additional production capacity may be too much, too soon. That could lead to oversupply and a decline in sand prices, which sand producers wouldn't enjoy. The other thing is that having sand in the Permian Basin will be imperative, which seems to justify every company's obsession with getting a mine in the region to cut down on transportation costs. If overall drilling activity picks up in 2018, then flat per well sand consumption may not be a big deal, but it is indeed something worth watching.
Still no good word on the international markets
Even though we've seen a considerable pickup in North American drilling activity, Miller seems to think that we're still a ways away from a significant rebound in the international oil market:
Production sharing? No thank you
This past quarter, Schlumberger has received a lot of questions from analysts about its recent acquisition of 600,000 acres of drilling rights in Canada. Schlumberger has a production management program that develops a reservoir for a producer in exchange for a percentage of profits. Schlumberger seems to think this is a model that helps to balance its portfolio of oil services. Miller, when asked whether Halliburton is interested in doing something similar, responded with this:
Asset velocity is Miller's way of saying he wants the company to have lower capital obligations for the company and a more asset-light approach. This means lower numbers of equipment and crews that execute jobs more efficiently and quickly move from job to job. For Halliburton, this means higher rates of return for each individual crew. Investing in production management or integrated asset management programs can tie up a lot of capital for a long time, which can be a hamper on returns, but can provide longer-term cash flows. Perhaps it is a future model for oil services companies. At this moment, though, Halliburton doesn't seem that interested.
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