Halliburton Company Versus Schlumberger Limited: The 2016 Market Outlook

By Matthew DiLalloFool.com

There isn't a whole lot of visibility in the oil market right now. Photo credit: Flickr user Stig Nygaard.

It's can be very fruitful to listen to differing opinions. For one, listening to both sides of an argument can broaden one'sperspective. Further, when it comes to investing, hearing out both sides can help investors spot key trends they might have otherwise missed.

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The market outlook for the oil-field service industry in 2016 is no different. There are two very different opinions being offered by industry heavyweights Halliburton and Schlumberger . Here's what their admittedly cloudy crystal balls see in 2016.

The long pauseOn its third-quarter conference call, Schlumberger CEO Paal Kibsgaard provided his market outlook, which is founded upon two clear trends emerging. First, he sees signs that the oil market is indeed beginning to rebalance. Production is starting to drop while demand is growing. Because of this, it will "gradually translate into improvements in oil prices going forward," according to Kibsgaard. Higher oil prices would seem to suggest that better days are ahead for industry activity levels. However, Kibsgaard's view is that,

The bottom line of Schlumberger's view is that oil prices should begin to recover in 2016. However, oil-field activity won't rebound along with oil prices because oil companies will use that cash flow to repair their balance sheets. That will push a rebound in drilling activity out to 2017.

Getting ready to rampHalliburton, on the other hand, actually has quite the opposite view. CEO Dave Lesar said that,

What Halliburton sees is that when oil prices rise, so will activity levels. It sees producers almost immediately reinvesting their higher cash flows into new wells. One reason why Halliburton sees a sharp recovery is due to the short-cycle nature of shale. We see this in the slide below, which shows that shale wells not only offer high returns, but those returns can be realized quicker than any other oil project because shale wells can be completed in months while other oil projects can take years to deliver first oil.

Source: Halliburton Company Investor Presentation.

Because of this, shale is among the most flexible low-cost sources of oil. We saw this flexibility on full display this year withshale producers adjusting their capital budgets with quite regularity, in some cases adjusting it higher when the oil price rallied earlier in the year, only to reduce the budget when that rally faded. Because of this flexibility, Halliburton's view is that once producers have some excess cash flow from higher oil prices, the first place that cash will be invested will be in additional shale wells, which will boost activity.

Investor takeawayClearly, Schlumberger is taking the more cautious approach with its view that 2016 will likely be a very tough year for not just oil-field service companies, but those whose business is driven by oil and gas activity. As such, it suggests that there's not much upside to owning the stocks of companies that depend on industry activity levels improving, because even when oil prices improve, activity will be held back because oil producers will horde cash. That said, this is not what Halliburton sees because it believes that the flexibility of shale should lead to a quick rebound in activity levels.

Suffice it to say, it will be interesting to see which oil-field titan wins the outlook battle. However, if I had to choose one I'd lean toward Halliburton's view. That's because from what I've seen, most shale drillers tend to be obsessively focused on spending every dime they can to grow production and I just can't see them holding back the moment prices finally improve. Instead, it wouldn't surprise me one bit to see drillers accelerate activity as soon as higher oil prices arrive because many are just chomping at the bit to unleash production growth.

The article Halliburton Company Versus Schlumberger Limited: The 2016 Market Outlook originally appeared on Fool.com.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Halliburton. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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