'Ugly Right Around The Corner' In Oil Field Services, Credit Suisse Cautions

In a recent report from Credit Suisse, analyst James Wicklund projects that despite falling rig counts, U.S. oil production wont be bottoming-out anytime soon. This outlook likely means an extended delay in the long-term price recovery of the U.S. oil field service (OFS) sector.

Short-Term Opportunities

According to Credit Suisse, as the rapid decline in U.S. rig counts subsides, market optimism could result in a short-term boost for OFS stocks and create opportunities for near-term investors.

However, despite the current 55 percent decline in rig counts, there is still an estimated 5,000-surplus of drilled-but-uncompleted (DUC) oil inventory. According to the report, this surplus, coupled with rig count growth forecasts of up to 450 additional rigs added by the end of next year, makes continued overproduction likely and will delay a true turning point in the market.

Long-Term Challenges

Preannounced Q2 earnings from five companies, including Newpark Resources Inc (NYSE:NR) and Oil States International Inc (NYSE:OIS), reflect that recovery for the U.S. oil sector is not yet in sight. Declines in activity and pricing for these two companies seem to indicate that a V-shaped recovery for OFS stocks is now off the table.

The United States Oil Fund ETF (NYSE:USO) has gained more thna 20 percent in the past three months, but remains more than 48 percent below its levels from one year ago.

With Q2 activity falling short of the projected midpoint, Credit Suisses outlook for Q3 is no longer optimistic, and Q4 is now the new target for margin bottoming in the OFS industry.

Whats Next

According to Credit Suisse, the release of Q2 earnings should provide a dose of reality to the OFS sector. With OFS companies still willing to lose money in the service of their clients, a solid foundation for price recovery in the OFS sector has yet to be laid.

In the meantime, however, accelerated changes in business models, strategic shifts by deepwater players, and improvements in reservoir understanding should provide some financial relief to many OFS companies.

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