Why Oilfield Service Stocks Are Rallying Today

What happened

Oil prices rebounded sharply on Thursday, thanks to a series of tweets by President Trump. That rally sent most energy stocks soaring, including those of oilfield service companies. Several popped double-digits at one point in the day, led by TechnipFMC (NYSE: FTI), Oceaneering International (NYSE: OII), Helmerich & Payne (NYSE: HP), and Halliburton (NYSE: HAL).

So what

Oil prices rose a remarkable 25% on the day, settling right above $25 per barrel. Fueling that massive rally were tweets by President Trump that Russia and Saudi Arabia had agreed to cut their oil production by as much as 15 million barrels per day. If true, that would help stabilize the oil market, which has been pulverized by the massive disruption in demand due to the COVID-19 pandemic.

An oil field at sunset

Image source: Getty Images.

Stabilization in the price of oil would be welcome news for oilfield service companies. The industry will already experience a significant decline in revenue this year due to the oil-price crash. One analyst sees spending on oilfield equipment and services plunging 21%, which would push it down to its lowest level since 2005. Spending, however, would likely fall even further if major producers Russia and Saudi Arabia don't step in to support the market. That's why stock prices are bouncing back today: Their support would hasten the industry's ability to return to some sense of normalcy once oil demand picks up following the end of the pandemic.

However, with market conditions currently unclear, service companies have had to cut back on costs to ensure they survive this downturn. TechnipFMC, for example, slashed its capital spending plan by 30%, which will save it about $150 million. The company also said it would target more than $100 million of cost reductions in one of its business units, and another $30 million of corporate overhead costs. Oceaneering also recently reduced its capital spending range, and planned to cut other costs.

Helmerich & Payne, meanwhile, recently said that it would cut its dividend by 65% following its June payment. That marks an abrupt end to quite a legacy: The company had increased its payout for 48 straight years. That move, along with a 23% reduction in capital spending, puts the company in a better position to weather the current storm.

Analysts believe more oilfield service companies should cut their dividends due to the depth of the current downturn. Bernstein, for example, put out a note yesterday stating that TechnipFMC, Halliburton, and others in the sector should all follow Helmerich & Payne's lead by reducing their dividends, given how much their revenue will likely fall this year. One analyst, for example, expects Halliburton's fracking revenue to fall below $4.1 billion this year, which is less than 2016's low.

Now what

The oil-price crash has hit oilfield service stocks hard. That's because their customers have slashed their spending plans, which will cut deeply into the revenue earned by the service industry. As a result, they've had to cut back on their spending as well as their dividend payments.

However, investors see a glimmer of hope today on reports that Russia and Saudi Arabia could put an end to their price war and go back to supporting the oil market. If those prove to be accurate, that support would help stabilize the market. However, if the two countries hit another snag in their negotiations, then oil prices and service company stock prices could give up today's gains, and then some.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Oceaneering International and TechnipFMC. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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