SLB, Baker Hughes and Halliburton are on course for strong financial performances in the coming quarters after the trio of oilfield services (OFS) giants all posted a sparking set of results for the first three months of the year. All three posted improved topline numbers, margins and cash flow in the first quarter as against the comparable period a year earlier. Following a similar strategy to many exploration and production (E&P) operators, the trio have also focused on returns to shareholders and increasing dividends, with two hatching a share repurchase plan for the year. With energy security being a priority for most countries and supply chains remaining capacity constrained on many fronts, Rystad Energy believes market fundaments necessary for OFS players to boost their financial performance will remain strong for the rest of the year. This aligns with our previous analysis highlighting the revenue growth potential and margin improvement trend expected for the OFS sector as a whole in 2023.

Big three cheer surging revenues

The three OFS majors all posted robust results for this year’s first quarter and saw steady growth year-on-year (YoY). The companies’ results revealed new highs in first-quarter revenues, with upstream revenues for both SBL and Halliburton close to levels not seen in the first quarter in the four previous years, while for Baker Hughes they were at their highest in the first quarter in eight years.

SLB saw first-quarter revenues increase by close to 30% YoY, fueled by growth in the well construction and production systems segments, which both saw over 30% growth. This was on the back of improved pricing in both North America and Latin America, with both regions witnessing a whopping 45% growth in the well construction segment. The onset of increased drilling demand was also evident in Halliburton’s revenues, with the company posting over 30% YoY growth in the first quarter, supported mainly by the completion and production unit, which was higher by as much as 45% as demand for pressure pumping services increased, sales for completion tools improved and Kuwait and North American Land saw improved need for artificial services. As such, the higher demand for drilling-related services globally saw Halliburton’s drilling and evaluation segment post 17% YoY growth. Baker Hughes also posted good results, with revenues surging 18.2% YoY in 2023 but remaining broadly flat from last year’s fourth quarter. The growth in revenue from last year’s first period was on back of higher volumes across both the oilfield services and equipment (OFSE) and industrial and energy technology (IET) business segments.

Regionally, the three companies reported growth in revenues stemming from across the globe as demand for drilling activity rose. SLB posted a 34% YoY increase in revenues in Latin America on the back of supplying offshore production systems for major developments in Brazil and Guyana, which led to the company’s production systems segment bringing in 50% greater revenue in the region. Demand for subsea and surface pressure systems is what fueled Baker Hughes’ growth in its OFSE segment in this year’s first quarter and this product line saw a 60% sequential increase in orders in the quarter on back of Azule Energy awarding a significant subsea equipment contract for the development of its Agogo field offshore Angola, which is among the largest subsea tree awards for Baker Hughes in almost five years. The main contributing region to the increased revenue growth in the OFSE segment was Latin America, which saw 50% YoY growth. Similar trends were also seen with Halliburton’s reported revenues – amid a still strong but somewhat plateauing North American market, Latin America posted 40% growth, primarily due to increased well construction services and stimulation activity in Mexico and Argentina as well as improved project management in Mexico.

Another key region for the three players was the Middle East, with Baker Hughes’ OFSE segment bring in 23% higher revenue in the Middle East and Asia. For Halliburton, growth in the Middle East came from Saudi Arabia where all product lines saw improved activity, further supported by improved well construction services and increased project management activity across the region. SLB also posted double-digit growth from the region as drilling, intervention and evaluation activity picked up in Saudi Arabia, the UAE, Qatar and Oman, including weather-impacted simulation activity in Saudi Arabia.

The Middle East is already set to exceed all the other regions this year in terms of the offshore upstream sector, driven by massive projects in Saudi Arabia, Qatar and the UAE. Around $33 billion is set to go on offshore investments in the Middle East in 2023, a near doubling of the $17 billion seen just two years. ago. Already we see that huge demand for oilfield services in the region is pushing up prices in the supply chain due to capacity constraints, with a 30% YoY increase in demand of jackup rigs.

Improved Margins

Along with the increase in revenues, all three companies also benefitted from an improvement in both their adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margins and net income margins. This was driven by capacity constraints in many service segments within the service industry along with some general easing of inflation and an increase in service prices.

SLB saw margin expansion in both its adjusted EBITDA as well as adjusted net profit margins. The adjusted net profit margin improved by around 350 basis points to 11.7% in the first quarter of 2023 compared to the same period last year. The adjusted EBITDA margin of 23.1% was higher by 210 basis points on the back of improved profitability in measurements, integrated drilling, equipment sales and fluids as higher activity and improved pricing supported business operations. Baker Hughes also enhanced its profitability, as the company saw its adjusted EBITDA margin increase to 13.7% at the end of the first quarter this year from 12.9% in the same period last year. Furthermore, the adjusted net income of the company increased by $144 million and its adjusted net income margin grew by 210 basis points in the most recent quarter relative to the first quarter of 2022. As for its OFSE business segment, Baker Hughes posted 33% higher incremental adjusted EBITDA, with the adjusted EBITDA margin higher by 180 basis points from last year. This was a result of improved efficiencies and increased sales volumes, although margins were sequentially lower due to lower cost productivity. Halliburton followed suit and more than doubled its net income per diluted share compared to the first quarter of 2022. Its adjusted EBITDA margin at the end of this year’s first quarter stood strong at 21.5%, 360 basis points higher than the same period last year. The improvement came from higher completion tool sales globally as well as improved wireline and testing services around the globe. For 2023, Baker Hughes expects its OFSE business segment’s EBITDA margin to expand by 150 basis points to 200 points.

The tightening of the service market and anticipation of increased oil and gas production offers some bargaining power back in the hands of these suppliers, which we believe will be positioned to further improve their margins.

Cash Flows and Returns to Shareholders

All the three companies reported significant improvements in cash flow from operations (CFO) relative to the same period last year, with Halliburton’s CFO growing by more than 500%. Additionally, the companies have even made incremental capital expenditures in their businesses. With a full-year capital budget of between around $2.5 billion and $2.6 billion, SLB spent $410 million in the first quarter of this year alone. The company also launched a share buyback program, with repurchases totaling more than $200 million-worth of shares. Added to that, the company paid $249 million in dividends to shareholders. Overall, the company targets a total return of $2 billion to shareholders in the form of dividends and share buybacks. As for Baker Hughes, even though the company reported an improvement in both its CFO and capital expenditure in this year’s first quarter, management decided not to proceed with any share repurchase program in the quarter and focused on restoring cash levels after undertaking multiple small acquisitions in the past couple of months. Baker Hughes did, however, maintain its quarterly dividend of $0.19 per share. The company plans to return 60% to 80% of its free cash flow (FCF) to shareholders at some point during this year. Halliburton repurchased approximately $100 million of its shares in the first quarter of this year and paid out $145 million in dividends. The company for this year plans to return at least 50% of annual FCF to shareholders.

Energy Transition Push Continues

While operations of all the three companies reflected solid performance in the first quarter of 2023 and we expect this continue for the rest of the year, all three maintained their focus on and continued to expand their footprint in the low-carbon energy sector. SLB’s new energy division reported an increase in participation in the carbon capture and storage (CCS) market, with the company now involved in over 30 projects globally. Baker Hughes entered two alliances during the first quarter of 2023 aimed at solidifying its presence in the low-carbon energy sector. These included the signing of a memorandum of understanding with Fortescue Future Industries to jointly look for opportunities for scale up and adopt novel technology solutions for green hydrogen, green ammonia and geothermal projects. Baker Hughes also entered into an agreement with eFuels specialist HIF on a technology to capture carbon dioxide directly from the atmosphere, direct air capture (DAC). For both its business segments, the company booked almost $300 million of new energy orders. With its existing presence in the geothermal market, Halliburton strengthened its core business by entering a joint venture for emissions management software with Siguler Guff, multi-strategy private markets investment firm, in February this year. In early April, shortly after the close of the first quarter, Halliburton introduced three new clean energy companies to its Halliburton Labs offshoot.