After a Harsh Winter, Oilfield Services Wake Up From Hibernation
Unusually severe winters can be both a blessing and a curse for the energy industry. This year, for example, as much of the United States suffered prolonged cold snaps and snow storms, high demand was met with production declines as facilities literally froze to a halt. As a result, a record volume of natural gas was withdrawn from storage in the lower 48 states, and energy companies everywhere began citing “weather challenges” in calls with investors and analysts in defense of their performance.
The headwinds elicited bearish grumblings from the market, which could do little else but begrudgingly tolerate production setbacks from companies like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and Chesapeake Energy (NYSE:CHK), which are all invested in U.S. shale plays that were blasted by the severe weather this year.
According to Chesapeake, operational issues and infrastructure construction delays had a negative impact on the production ramp in the Utica shale in particular. In its fourth-quarter earnings report, the company said, “As a result of the infrastructure and operational issues, the vast majority of Chesapeake’s wells that are connected to sales lines are on restricted choke and have not been producing at full capacity.” In a recent press release, Chevron added its two cents, warning investors of depressed first-quarter earnings thanks in part to weather-related downtime.
But after a harsh winter, the energy industry — and, in particular, oilfield services companies like Halliburton (NYSE:HAL), Schlumberger (NYSE:SLB), and Baker Hughes (NYSE:BHI) – appears to be gearing up for a strong second quarter. The optimism, championed by analysts like Stephen Gengaro at Sterne Agee, is due largely to the idea that there’s pent-up demand in the market thanks to the winter slowdown.
Gengaro is anticipating that the number of well completions will increase in the second quarter, providing tailwinds for oilfield services companies. According to Baker Hughes, first-quarter well count fell by 9 percent sequentially (52 wells) in the Marcellus basin, which stretches into the northeast U.S., and by 4 percent sequentially (30 wells) in the Williston basin, which covers much of North Dakota and some of Montana. These regions were hit with particularly severe weather this winter. Overall well counts declined 2.5 percent in the first quarter.
If Gengaro is correct and well counts increase in the second quarter, then oilfield services companies could continue an already impressive year-to-date rally. The Market Vectors Oil Services ETF (NYSE:OIH), which holds shares in Halliburton, Schlumberger, and Baker Hughes, is up more than 6 percent for the month ended April 15 and about 7 percent year to date. This compares against effectively zero growth for the S&P 500 over the same period.
Shares of Halliburton, which makes up nearly 12 percent of the Oil Services ETF, are up 19.9 percent year to date, while Schlumberger stock is up about 12.7 percent. Baker Hughes has rallied about 21.6 percent over the same period.