Taking the Temperature of Oil and Gas

01/15/2014 1:30 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The recent announcement from this company speaks volumes about the current condition of the global oil and gas industry, suggests MoneyShow's Jim Jubak, but even more can be gleaned from pending announcements.

I've never owned shares of Baker Hughes (BHI) but I still follow the company closely. Its reports on drilling activity around the world are some of best ways to take the temperature of the global oil and gas production and services sectors.

The company's January 10 announcement that it was lowering its guidance for the fourth quarter on declines in drilling activity in North America and Europe/Africa/Russia, has certainly contributed to weakness in the oil services sector and in the shares of competitors such as Schlumberger (SLB). With Schlumberger scheduled to report fourth quarter earnings on January 17, and with Baker Hughes scheduled for January 21, the question now is, “Has the lowered guidance from Baker Hughes de-risked the stocks in the sector or will there be enough disappointment in the actual reports to push the sector down farther?”

What did Baker Hughes say on January 10?

It announced that the count for US onshore wells in the fourth quarter had fallen to 9,056 wells, down 19 wells from the 9.075 counted in the third quarter.

Drilling activity declined, the company said, “primarily” due to weather delays in the quarter.

That might be seen as comforting—since weather delays are temporary—but there are signs that the problems are longer lasting than weather.

Which is why I want to see what Baker Hughes and Schlumberger report in the next week.

On the basis of current data, some Wall Street analysts worry that even though global activity is at record levels, capital spending looks to be slowing. About eight weeks ago, the Wall Street consensus was that capital spending would show a 10% increase in the United States and 10% to 12% increase in the rest of the world. I'm starting to see Wall Street reports pegging capital spending growth at half that consensus rate.

The other problem that Baker Hughes noted is a decline in margins. Again, the company cited weather as delays in drilling schedules added to costs.

Maybe. But I'm also looking to see if margin issues aren't related to changes in drilling technology, especially in US shale geologies, that have reduced the number of rigs needed and lowered the per well cost.

That's not a huge issue right now, in my opinion, but I'm hoping that Baker Hughes and Schlumberger cast useful light on margins in the oil service sector. (Schlumberger is a member of my Jubak's Picks portfolio.)

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Schlumberger as of the end of December. For a full list of the stocks in the fund see the fund's here.

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