As oilfield services bellwether Schlumberger Ltd. reports its first-quarter earnings April 17, the broader oil and gas industry will be listening closely to hear just how bad it is in the oil patch.

First-quarter earnings by oilfield equipment and services providers will reflect mounting struggles as activity by their customers — the exploration and production sector — drops sharply due to demand erosion and crude oil price weakness. Those with healthy balance sheets, free cash flow and scalable operations to navigate the current market will fare better, but most of them will still need to address their dividend payments, analysts said.

Morgan Stanley analyst Connor Lynagh said in March that assuming oil prices sink between $10 per barrel and $20/bbl, upstream capital expenditures and activity could drop about 30% below prior expectations. North America's land activity is at the greatest risk due to the economics of shale and the weakened cash flows of shale producers at these price levels, he said.

Schlumberger, which kicks off the first-quarter earnings season April 17, is proving its ability to steer through the challenging market. The company cut its workforce by more than 1,400 employees in the past six months and will continue to reduce its facility footprint, planning to shrink the areas in which it operates by an estimated 25% by the end of 2020, CEO Olivier Le Peuch said in January.

Houston-based oilfield services major Halliburton Co. is also taking steps to reduce its size to fit the market. Halliburton has furloughed thousands of employees at its Houston facility, and since December of 2019 has laid off hundreds of workers in Texas, Oklahoma and Colorado.

Moving away from North America

To offset the opportunities lost in U.S. land markets, Schlumberger and others, including Baker Hughes Co. with its LNG offerings, are looking for growth opportunities in international and offshore markets typically favored during tumultuous times.

Global activity, however, is "most ripe for negative surprises through the first-quarter reporting season on the back of COVID-related travel restrictions and work stoppages," Credit Suisse analyst Jacob Lundberg said April 14. The market could see as much as a 40% decline in the second quarter, according to Credit Suisse.

But Baker Hughes is also winning investor favor, announcing on April 13 a 20% reduction in capex versus 2019 levels and a "right-sizing" that will result in a $15 billion noncash goodwill impairment charge in the first quarter, which includes restructuring, impairment and other charges of about $1.8 billion, of which $1.5 billion would be recorded in the first quarter.

"Both measures were expected by investors, but the announcement took away the uncertainty," Lundberg said in an April 14 email.

Looking to the dividend

Still, Baker Hughes, Schlumberger and the majority of oilfield services companies and drillers, unlike Oklahoma-based driller Helmerich & Payne Inc., have thus far failed to address dividends.

Bernstein analyst Nicholas Green said in an April 15 note that all companies with less than pristine balance sheets or cash flows should suspend the dividend until further notice. He urged sector companies not to "attempt half-measures or face-saving compromises."

Helmerich & Payne, understanding that contract drilling will be among the hardest-hit sectors in the current oil market downturn, said March 31 it would cut its quarterly dividend by 65% from 71 cents per share to 25 cents. The cost-savings measure will leave shareholders with a near 18% dividend yield, among the highest in the sector, Green said April 1.

"[M]ore importantly, it ensures the company's balance sheet will remain in a strong position even as contract coverage wanes in coming years," Tudor Pickering Holt & Co. analysts said in an April 1 note.

'Material upside' ahead after pricing in annihilation

Maintaining healthy balance sheets will be a key to surviving the market down-cycle as the services sector faces a myriad of headwinds.

"We don't see pricing power, margins are going down, the sector needs defensive M&A, it is not yet on the right side of [environmental, social, and governance], and [the] oil price is likely to fall again before it rises," Green said April 6.

But against the headwinds, Green upgraded the sector to a buy. "The market has priced in annihilation, and yet our new research concludes numerous top-tier listed services not only survive but have material upside," even if oil prices hold at $30/bbl, he said.

Green upgraded Baker Hughes, equipment provider National Oilwell Varco Inc. and pipeline builder Tenaris SA to outperform. He said buy-rated Schlumberger and TechnipFMC PLC have major upside potential, but only offer safe balance sheets if they stop their dividend payments.

The analysts upgraded Halliburton and Patterson-UTI Energy Inc. to market-perform with high upside risk due to their low share prices. However, both companies face a risk of financial distress in an extended $30/bbl world, Green said.

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