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1、CORENorthAmericaOFSEarningsPreviewAChancetoSurveytheDamageINDUSTRYUPDATEEquityResearch15July2020EarningsseasonforOilfieldServices&EquipmentkicksoffonMondayJuly20,providingusourfirstopportunitytoassessthedamagefromtheoilprice/Covid-19collapse.WiththeUSrigcountnowdow
2、n67%sincemid-Marchandcompletionactivitydownevenmore,theonlyrealquestionisthemagnitudeofdecrementalmargins.Ontheinternationalfront,weexpectactivitytobedown15-20%q/q,slightlybetterthanthe~30%declineinint’lrigs(notablythesteepest/sharpestdropthaninanypriordownturn).Thep
3、roblemisint’lwon’tfullyrecalibrateuntilyearendandnowNOCsaredemandingpricingconcessions.Inasense,2Qresultsthemselvesdon’tmatterallthatmuchasinvestorattentionwillfocusonthe3Qguide(ifprovided)andanysenseoftrajectory/cadenceinactivitylevelstheremainderoftheyear,whichwill
4、tellusif2021estimatesneedtocomedown(probably).Toughtojustifyfromavaluationperspective.2020thusfarhasbeenataleoftwohalvesasOFSstockscollapsedinFebbeforebottominginmid-March(withHALandFTIdownanastounding~80%YTDatthatpointintime)butwithanextendedrallysincethen(whichhass
5、eenHALup170%sinceitsmid-Marchlow,forexample).Whilecyclicalstocksdeservetotradeathighermultiplesontroughearnings(oftena30%premiumhistorically),mostoftheOFSgroupiscurrentlypricingina2022recoveryonparorgreaterthanthosecomingoutoftheprior2downturns(30-50%spendinggrowth),
6、whichwebelieveisunlikely.Furthermore,we’renotconvinced2021estimateshavebottomed,whichisaprerequisiteforanysustainablerally,inourview.Asilverlininginthedistance:dividendcutsandcost-outtargetscreateastrongsetupforwhenactivitylevelspickupagain.It’sgoingtobealongroadtore
7、covery,soassuaginganyfinancialconcernswillbeparamountwithinvestorsplacingapremiumongeneratingfreecashflow,workingcapitalrelease,andmanagingleverage.Muchofouruniversehasaggressivelycutcostsoverthepast6-9months,acceleratingandexpandingcost-outprogramssincethepandemichi
8、t.Assumingthemarketstabilizesoverthenextseveralquartersandslowlystartstoimprovein2021,weexpectmanyofthesecompaniestopostincremental
