As bad as conditions are for oil producers, the outlook for the firms that sell to that sector – oil-field services companies – is worse.
One clear sign of the oil field services' firms woes relative to the producers: the substantial decline in the Baker Hughes rig count coupled with still-rising U.S. output.
U.S. oil production vs. rig count
Granted, providing rigs is only one of the ways in which oil-field services companies generate revenues; this comparison surely oversimplifies the relative hit to financial results.
But in Canaccord Genuity's first-quarter earnings preview for Canadian oil field services companies, analysts John Bereznicki and Oliver Bailey warn that the consensus estimates are "generally optimistic."
The analysts project that this segment's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the first three months of the year will be 20 per cent lower than the consensus estimate, which calls for a 38-per-cent decline in EBITDA for the median company relative to the same period in 2014.
"While the Q4/14 earnings season largely reflected [exploration and production] spending inertia from a more favourable commodity price environment, we believe Q1/15 will be more fully indicative of the new normal," they write. "We also anticipate dividend cuts through the Q1 season with the pumpers most likely to revisit their payouts."
The pumpers in Canaccord's coverage universe are Trican Well Service Ltd., Calfrac Well Services Ltd., Canyon Services Group, Inc. – companies the analysts think will have a more difficult time reducing costs.
While utilization rates for contact drillers, such as CanElson Drilling Inc., Trinidad Drilling Ltd., and Western Energy Services Corp., have declined, the analysts believe that these firms were likely able to weather the storm better than their pumping peers by spending less on labour.
Mr. Bereznicki and Mr. Bailey highlighted McCoy Global Inc., Essential Energy Services, and Calfrac as firms that may trim their dividends.
Trican and Canyon are seemingly more at risk of reducing their payouts. According to the analysts, the former may breach its covenants; reducing some of the roughly $45-million it spends on its dividend each year could provide some breathing room. The latter, on the other hand, has a payout ratio in excess of 200 per cent for this year, based on Canaccord's estimates.
In early April, TD Securities analyst Scott Treadwell wrote that Trican Well Service Ltd. and Essential Energy Services Ltd. would reduce their payouts.
"We remain biased to domestic service providers with balance sheets that allow them to be opportunistic through the downturn," such as Secure Energy Services Inc. and Total Energy Services Inc., said Canacccord's analysts. CanElson Drilling Inc., which halved its divided in January, is their preferred driller.
In the face of what promises to be a poor earnings season – whether the consensus or Canaccord is closer to the actual results – the analysts affirm that if we have indeed reached a bottom in oil prices, this group could be poised for a massive surge.
After West Texas Intermediate bottomed in 2009, "three weeks later the S&P/TSX Energy Equipment & Services (STENRE) Index staged a rally that yielded a ~73 per cent return over the following six months, despite a falling Western Canadian Sedimentary Basin rig count and downward consensus estimate revisions," wrote Mr. Bereznicki and Mr. Bailey. "Should U.S. oil production plateau and the onset of the U.S. driving season stimulate material demand growth this spring, history suggests improving oil price sentiment could provide a sustained tailwind for the energy services sector. Conversely, fears over burgeoning oil inventories or unforeseeable global demand shocks could create a relapse in the current oil price recovery."
The earnings season for this segment begins at the end of April.