Shares in oil services firms have had a tough time this year, with confidence hit by falling oil prices.
While there is certainly a strong historical correlation between the share prices of oil services firms and crude, investors should not solely focus on current oil prices when considering investing in such companies.
Stock price slump
Schlumberger, the world´s largest oil and gas services firm, has seen its stock price slump by 26% since the start of 2017.
The shares are around 47% lower compared with 2014, when oil was last trading at $100 per barrel. Brent crude oil futures are currently priced at around $52 per barrel, having eased from $57 since the beginning of the year.
However, beaten down oil services stocks should not be written off altogether, especially as many have been engaging in cost cutting, restructuring and consolidation over recent years.
In Schlumberger´s case, there has already been some tentative recovery in revenues.
There´s no doubt that the slide in oil prices since 2014 has had a big impact on the industry. A plunge from $100 per barrel to lows of $30 per barrel early last year brought about a sizeable squeeze in spending on the part of exploration companies.
Drilling was scaled back dramatically in the face of such a sharp turnaround in prices, resulting in a major fall in demand for the oil and gas services sector.
Schlumberger´s revenue is still a long way off from recovering to the heady heights of three years ago. It generated revenues of $36bn in 2015 and $28bn for 2016, versus around $49bn in 2014.
Nevertheless, sales improved 6% and 4% versus the year-ago period over the 2017 first and second quarters respectively.
Blessing and curse
For Schlumberger, a sharp pickup in North American exploration activity is making up for continued declines on a global basis.
Revenue from its North American operations is up by around a third year-on-year, as the region´s drilling activity enters a strong recovery. In contrast, international revenues are down by 4%.
Technology advances mean US explorers are able to break even at lower oil prices – below the $40 per barrel mark.
But this is both a blessing and a curse for the oil services sector.