2020年行业展望：强调良好的资产负债表、自由现金流能力.docx

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1、North America Equity Research27 December 2019Oil Services and Equipment Sean C Meakim, CFA AC (1-212) 622-6684 sean.meakim Bloomberg JPMA MEAKIM J.P. Morgan Securities LLC Danyel J Desa (91-22)6157-3301 danyel.j.desa J.P. Morgan India Private Limited Andrew P Herring, CFA (1-212) 622-8585 andrew.p.h

2、erring J.P. Morgan Securities LLC Corey Mergenthaler, CFA (1-212) 622-1167 corey.mergenthaler J.P. Morgan Securities LLCFigure 1: YTD Performance by Subsector40%20%0%-20%-40%-60%25% 30%0%-3%4%Figure 2: Diversifieds YTD Performance, Indexed-10%-25%Source: Bloomberg.Source: Bloomberg.See page 38 for a

3、nalyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of thi

4、s report. Investors should consider this report as only a single factor in making their investment decision.J. P Morgan2020 Subsector OutlooksEmphasize Good Balance Sheets, FCF Capability, Idiosyncratic Catalysts and Cheaper ValuationsWe are highlighting an excerpt from our 2020 Outlook: You Can Onl

5、y Reap What You Sow; Cash Harvesting Cycle to Sort the VWz- from the Chaff report published December 13th. Diversifieds acknowledge the realities of the current cycle mean “adapt or die； now time to deliver. The three large caps entered the year coming off a brutal end to 2018 (-14% in December 2018

6、), and quickly rebounded through the first month of the year (+-20% January 2019). The rally then came to an end during the 1Q19 reporting season in late April, when the possibility of a “beat and raise” year drifted away again (though quarterly results were in-line). Stocks then fell significantly

7、(-13% since 4/22), with SLB and HAL reaching decade lows of $31 and $17 during the year before modestly recovering. On a relative basis, the large caps underperformed the S&P500 fbr the third consecutive year (this year -22% v. SPX YTD) and also trailed the commodity by double-digits for the third s

8、traight year, affirming the key to positive stock performance lies outside simply a supportive oil price. We continue to see our “watched pot never boils“ thesis play out among the group, as the large caps again experienced double digit revisions to forward year estimates, with consensus 2020 EBITDA

9、 estimates declining 12-20% across the three through 2019. The correlation between the severity of the cut and magnitude of the underperformance further supports our thesis that in order for these stocks to work, they have to break the negative estimate revision cycle. Those with greater long-cycle

10、exposure (SLB) and non-OFS exposure (BKR) have shown a relative stability in estimates, and claim positive stock performance on the year (though lagged the market materially).Source: J.P. Morgan estimatesFitting (Not Fighting) the Cycle in North AmericaMoving on from market share offense, HAL and SL

11、B defend marginsHAL and SLB realize scale is no longer the answer in NAMBoth Halliburton and Schlumberger have acknowledged that the North America market is not returning to prior cycle peak levels in the near term. Rather than battle for market share, and continuing to destroy margins (HAL C&P -200

12、bps y/y in 3QI9, SLB Production -70bps), both companies have embraced a focus on returns, which we believe will ultimately require shrinking their existing footprints. We believe in order to maintain (or even grow) margins in North America both companies will need to shrink the top line in order to

13、focus on the higher margin work. The one company missing from this conversion is BKR, after writing down its stake in BJ services, the companys primary exposure to NAM comes from production services like chemicals and artificial lift. While we believe the company will face headwinds in NAM (a low ti

14、de lowers all boats in this case), we believe its presently more insulated than its peers.SLB has more levers to pull, could drastically change NAM portfolioSLB leaving “all options on the table” with respect to NAMAfter largely ignoring the NAM market, viewing it as too commoditized to add value, S

15、LB surprisingly increased its footprint in the region 24 months ago when it acquired WFTs 1mm HHP pressure pumping fleet. Now, as the market has deteriorated, and new CEO Olivier Le Peuch (OLP) has taken over, the company acknowledges that growth for growths sake“ has not been the correct approach i

16、n North America. Schlumberger is instead focusing on a fit for basin, strategy where it leads with technology and employs less capital intense business models such as technology rentals. As a part of OLPs new strategy, the company is currently evaluating the North American portfolio and has stated t

17、hat nothing is “off the table” with respect to its composition. The biggest eye sore in NAM is the pressure pumping business, in our view, but we struggle to identify a willing (public) buyer in this market. SLB has acknowledged actively stacking fleets through 2H19 and we believe well hear more con

18、crete plans with respect to this business early in 2020.10Figure 21: NAM Revenue % of Total Over Time10%5%0%Revenue EBIT MarginSource: Company ReportsSource: Company Reports. Note: $ in millionsHAL looks to cost-cutting to preserve marginsHAL maintains NAM leadership but “squeezes the rag” on cost,

19、capex to adapt Halliburton has accepted that the current cycle will not resemble the peak levels experienced in 2014 (cycle of scarcity). Therefore, market leadership this cycle will not come from top line growth, but margin expansion and FCF generation (cycle of abundance). Synonymous with North Am

20、erica pressure pumping, HAL has historically pursued a strategy of market share offense during periods of activity decline. However, in an oversupplied market (and likely to remain so) this pursuit is margin dilutive. To the contrary, HAL has acknowledged focusing on profitability by walking away fr

21、om underperforming work and stacking equipment. The company expects to capture $300mm in cost savings over the coming quarters, with recent headcount reductions already taking place in California, the Rockies, and the Midcon regions. We expect more to come, but ultimately believe this attention to c

22、osts will help limit the utilization-driven decremental margins in 2020.Figure 23: HAL FCF ($mm) and Capital Intensity (RHS)$2,500 $2,000 $1,500 $1,000$500 $0-$500-$1,000-$1,500-$2,000-$2,500-$3,00014%12%10%8%6%4%2%0%FCF Capex/SalesSource: Company reports, J.P. Morgan estimatesSource: Company report

23、s, J.P. Morgan11International to Offset Top Line Declines, but Margins Will Take WorkSince the oil price bottom in 2016, global OFS revenue growth has been driven by activity in North America as international markets resembled a very wide U shaped recovery. However, after a -274 rig decline in the U

24、.S. over the past year, paired with a +34 rig add internationally, the engine of growth has clearly swung to non-NAM markets. Within the diversifieds, SLB and BKR offer the greatest leverage to international service markets, though we acknowledge Baker offers a broader service offering through OFE a

25、nd TPS. With our first look at global spending in 2020 pointing towards another double-digit decline in NAM and a flat (+/-5% confidence interval) international spending outlook, we expect international markets to be the source of (modest) top line growth in 2020. However, international markets stil

26、l remain competitive and international margin accretion will stake a bit of self-help.Figure 25: Large Cap Geography Split100%80%60%40%20%0% NAM International65%35%BKRFigure 26: International Growth (indexed to 1Q16)150-SLB HAL BKRSource: Company reports, J.P. Morgan estimatesSource: Company reports

27、, J.P. Morgan estimates. Note: BKR represents just OFSAfter years of distraction BKR gets back to businessAfter years of distraction, Baker Hughes makes a push back onto the scene Whether from the failed HAL deal or the merger, integration, and now separation from GE, Baker Hughes has been in a stat

28、e of distraction since late 2014. The result of which has been a decline in market share, primarily in international markets. However, with the disruption largely in the rearview, Baker looks to reclaim its legacy market position, if not its prior form (as its name already has). With respect to its

29、international position, we believe BKR has mostly regained its footing. After performing in-line with its peers through most of 2018, the company has been able to outgrow its peers internationally through 2019 YTD, a primary initiative for the management team since taking over the legacy BHI busines

30、s in 2017.12A key to Bakers success this year has been its leverage to gassier regions in the Eastern Hemisphere, and given our outlook fbr these regions to lead spending in 2020, we expect BKR to continue benefiting fi,om its footprint in these regions. With the companys market position returning t

31、o a more normalized level, its next focus of attention is on margin expansion within OFS and OFE. While the company has lagged its peers on an EBIT margin basis (in OFS) it has closed the gap considerably, adding nearly 450bps since 2017 and Baker sees no reason that it cannot close the discount ent

32、irely (for our part, we model improvement for BKR but with a gap remaining through 2021).Figure 27: BKR International Growth v. Peers8%3%-2%-7%-12%12%44%4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 Peer Average BKR BKR bHAL bSLBSource: Company reports, J.P. Morgan estimatesSource: Company reports, J.P. M

33、organ estimatesSchlumberger targeting return to prior peak, a lot left to trimSLB has acknowledged its footprint grew too quickly this cycle and is now attempting to unwind its scale in certain areasIn his inaugural presentation to the investor community this fall incoming CEO Olivier Le Peuch (OLP)

34、 set an open-ended target of returning international margins to prior peak levels (+500bps from current levels). The roadmap OLP laid out to reach this goal traverses objectives over several overlapping time frames. In the near- term (within 2 years) the focus is placed on eliminating the bottom tra

35、nche of contracts that are highly margin dilutive due to either terms or challenging execution risk (LSTK). The biggest question we see here still remains how SLB will address the highly dilutive (we estimate possibly even 0%) Middle East IDS drilling contracts.These have clearly been a focus over t

36、he past few quarters, and OLP is committed to making this project margin accretive to the Drilling segment, but we believe the geology may stand in the way. Outside of IDS, SLB has acknowledged already walking away from poor performing contracts, and we expect this trend to be the key focus for marg

37、in expansion in 2020 (and beyond) as the other levers to grow margins are either too difficult to quantify (i.e. digital) or longer-term in nature (i.e. shifting commercial agreements to performance models). In a similar manner to its NAM ambitions, we believe SLBs international top line may need to

38、 shrink as well in order to reach these targets.25%Source: Company imports, J.P. Morgan estimates. Note: $ in millionsFigure 29: Drilling Segment Revenue and EBIT Margins (RHS) $6,00013Execution Time for BKRs TPS SegmentLNG award domination becomes expectation, 2020 a key year for margins Baker cont

39、inues to push the narrative on rising LNG demand, as the company expects to see another -lOOmtpa sanctioned by 2023, in addition to the 80mpta sanctioned this year (or so) in order to support the nameplate demand of 650mpta by 2030. We expect BKR to generate $8bn in TPS orders in 2019 (+24% y/y), an

40、d management believes it could see a similar number in 2020 should the timing work in its favor. Baker has managed to win nearly 100% of LNG awards this cycle, an impressive feat that almost seems lost on investors as a BKR win has now become the expectation, leaving little for an upside surprise in

41、 project awards. Therefore, the upside in TPS is to come through execution. We expect the company to grow TPS revenue 17% y/y in 2020, while margins expand 200bps firmly into the mid-teens. However, as BKR starts to convert backlog into revenue, a risk remains how quickly TPS margins can progress. P

42、rojects typically start at very conservative margins given start-up costs and depending on the level of competition could be awarded at competitive prices. Thus should BKR need to aggressively defend market share the margin ramp could stall before reclaiming the +20% levels investors are expecting.F

43、igure 31: TPS Revenue and Margin Trajectory$2,50020%$2,000. 人16%Figure 30: BKR TPS Orders$3,000$2,500Source: Company reports, J.P. Morgan estimates. Note $ in millions.Roe RONo o o o o $ 5 o55 115 $ $Revenue EBIT Margin4%0%8%86Lzo寸QxcpRoeRozRs08 08CO京Zozs866658 6ON 6OL 80寸 8088OZSource: Company repo

44、rts, J.P. Morgan estimates. Note S in millions.14Capital EquipmentOrders Picking Up, Will Margins Follow? Prefer Select Offshore and Best-in-class OnshoreClear dispersion in performance across the groupOffshore-leverage and quality financial performance supporting Cap Equipment stocks; NAM exposure

45、hurtingDespite chalking up another year of negative equity returns, the Capital Equipment names have outperformed the OSX by 7% YTD. Consistent with the broader OFS universe, the group started off 2019 on a positive note (with most stocks up nearly 20% through May) before ultimately turning negative

46、 in the second half of the year, decoupling from the commodity and following suit with a worsening NAM environment. After trading in-line with the smid-caps in 2018 (-46%), the group diverged in 2019, outperforming the smids by 23% YTD as offshore optimism and comparably tame estimate revisions (rel

47、atively) supported the equipment stocks. This year once again confirmed our belief that forward estimate revisions hold the key for stock performance.One of the few outliers in our coverage to experience positive forward EBITDA revisions, DRQ, has also outperformed the subsector average by 50% YTD. While on the opposite end of the spectrum, those heavily tied to NAM completions, FET and NCSM, experienced significant estimate revisions as the activity outlook deteriorated through the year, and returned -57% and 70% YTD, respect