Why these oil stocks are skyrocketing today

What happened

Leading company in the field of petroleum services Schlumberger (NYSE: SLB) sees better days for the oil industry. The company not only provided strong financial guidance for the year, but the company’s CEO also gave a very bullish forecast at an industry conference.

This fueled a rally in Schlumberger shares, which jumped more than 7% at 2:45 p.m. EDT on Wednesday. It also pushed up the shares of several other oil service companies, including Basic laboratories (NYSE: CLB), Oceania International (NYSE: OII), Liberty Oil Field Services (NYSE: LBRT), TechnipFMC (NYSE: FTI), and Nextier Oilfield solutions (NYSE: NEX), all of which have increased by more than 10% at some point in the day.

Image source: Getty Images.

So what

Schlumberger provided investors with updated financial guidance. The company expects its annual revenue for 2021 to exceed $ 22.5 billion, well ahead of the consensus estimate by current analysts. In addition, the oil services giant sees its full-year EBITDA margin adjusted between 20.8% and 21.3% and its free cash flow margin above 10%. This is an improvement in its Adjusted EBITDA margin, which was, for example, 20.1% in the fourth quarter of 2020 and 19.4% in the third.

CEO Olivier Le Peuch also said at an industry conference: “With the demand for oil expected to reach pre-2019 levels by the end of 2022 and the tightening of supply, our business oil and gas is on the brink of an exceptional growth cycle. Given our position and strategy, we are positioned to generate exceptional returns in the short to medium term. “

While Schlumberger’s global scale and sheer size place it in a privileged position to benefit from the growth cycle it envisions; other service companies will also benefit from improved market conditions. For example, an increase in onshore drilling activity in North America will have a direct impact on companies focused on providing these services such as Liberty Oilfield Solutions and Nextier Oilfield Solutions. Meanwhile, an improvement in offshore drilling is positively affecting companies such as Core Labs, Oceaneering International and TechnipFMC, given their focus in this market.

These oil service companies will benefit from improved market conditions in two ways. First, they will benefit from providing a higher volume of service to customers as they drill more wells. On top of that, they should be able to raise prices. This is why Schlumberger expects strong sales and margins in the coming year. Its peers are also expected to see their revenues and margins increase as they benefit from higher service volumes and improved pricing as competitive pressures subside. This should allow oil service companies to generate more free cash flow, which they can use to pay down debt, expand their operations, or return money to shareholders through dividends and buybacks.

Now what

Oil service companies are coming out of a brutal 2020. Oil prices have plummeted due to the pandemic, prompting oil producers to cut spending. This has hurt service volumes and prices.

However, with the deployment of vaccines, demand for oil improves, pushing up prices. This is starting to give the oil companies the confidence to increase their spending plans, which will provide more work for the oil service companies, thus increasing their income and profits. If the cycle envisioned by Schlumberger comes true, oil service stocks could have a lot more to do as they increase their revenues, margins and profits in the years to come.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Felix J. Dixon