The macro theme for oil services is pretty clear...spend more in order to give the opportunities to find oil/gas:
But looking at the Baker Hughes numbers, the earnings bridge was downright mixed, even ex the disruption in Iraq, earnings would have been slightly down quarter-on-quarter. Why do I feel this is the norm for the oil services space?
Over the full year operating earnings may have been slightly down to US$1.9bn but revenues were up 14%. And the reason why as per the company? (my emphasis added):
'This success can largely be attributed to meaningful share gains in high growth markets such as the
The Middle East and Europe/Caspian areas in combination are not only bigger than the US but also generate a higher margin (12%+) versus just 9% in the US (although as noted above this has improved over the last year).
My view, coming to the company afresh, is that even with 10% rig count growth in international markets and 5% well count growth in the U.S. the company is likely to be trading on over x12 EV/ebit unless margin evolutions really surprise.
The company does have positives including a balance sheet that has debt equal to only one times ebitda, free cash flow generation and a buying back of shares (equal to c. 0.5% of share capital). The share also remains well off its 3 year highs.
There seems like a lot of messiness here and the US$50 level is closer to a single digit EV/ebit ratio plus the share has exhibited resistance/support at that point too. Given I don't feel too excited extrapolating the recent 2013 numbers and applying a x12-14 EV/ebit ratio onto them to justify the share price, I am going to keep a waiting brief.