Investor confidence in oilfield services companies took a step back in August as the oversupplied oil market failed to inspire an expected rebound in international exploration and production, analysts said.

Interest in the sector escalated after second-quarter earnings reports showed cost-cutting measures helped many companies beat earnings estimates and stay free cash flow positive. However, a little more than a month later, the share price gains have melted away.

Tudor Pickering Holt & Co. analysts noted the NASDAQ oilfield services sector index was up about 20% between July 17 and Aug. 10. Since then, the index has fallen about 8% despite NYMEX West Texas Intermediate crude oil prices' relative resilience, the analysts said. WTI crude is trading atop $40 per barrel after recovering from a drop below negative $37/bbl on April 20.

A decline in international activity has helped drive the dismal stock performance after oilfield services companies expected the flexibility demonstrated by the global markets in the second quarter would carry into the second half. Meanwhile, the U.S. land market continues to struggle.

"International producers have the opportunity to regain market share as a result of declining U.S. production, and this should translate into healthy activity levels internationally as oil demand recovers," Halliburton Co. Chairman, President and CEO Jeffrey Miller said July 20 during the company's second-quarter earnings call.

But Tudor Pickering Holt said international markets are headed in the "wrong direction," and international rig count data bear out the claim as the combined land and offshore rig count fell year over year from a total of 1,162 in July 2019 to just 753 in July 2020. There are 347 fewer land rigs and 60 fewer offshore rigs currently in operation internationally, according to Baker Hughes. From June to July, the land rig count fell from 587 to 560, while offshore rigs slipped from 194 to 183 over the same period.

Miller indicated the decline in activity in Latin America could reflect some customers deferring new projects. However, the decline in Middle East activity could be more significant, according to Tudor Pickering Holt. "It appears the Middle East — a key international geo-market — will see activity fade [in the second half]," the analysts said Aug. 21.

Decisions made in the second quarter as part of the OPEC+ agreement to curtail production drove national companies operating in the Middle East to maintain or reduce activity, Schlumberger Ltd. CEO Olivier Le Peuch said during the company's July 24 second-quarter call. Responding to the market turmoil, Saudi Arabia idled 40 rigs in the second quarter and could sideline another nine to 12 in the third quarter, Le Peuch said in July.

But industry participants said the Middle East could still provide some opportunity for sector companies despite the OPEC+ commitment to limit production. Schlumberger is offsetting lost opportunities in Saudi Arabia with increased activity gains in Qatar and Kuwait, while Halliburton, on a full-year basis, expects activity in OPEC countries to withstand the challenging market conditions, Miller said.

Tudor Pickering Holt said the North Sea, Latin America and even the North American onshore market could provide additional opportunities for oilfield services and equipment companies even as the backdrop remains far from rosy.

Houston-based producer Apache Corp. said Suriname in South America is now a vital part of its plans while it continues to operate a single well in the North Sea and one in Egypt. Meanwhile, Norway's Equinor ASA expects to prioritize investment in domestic projects as the giant Johan Sverdrup field propelled a 33% jump in the company's second-quarter oil output.

In the U.S., drilling and completions activity is beginning to recover from an eviscerated base, according to Bill Herbert, senior research analyst at Piper Sandler. However, preventing much further recovery, a structural shift from supply sources in the Lower 48, particularly in the Permian Basin, to supply sourced from the broader OPEC+ coalition may be underway, he said.

With the WTI crude oil price holding around $40/bbl, Miller expects a modest uptick in completions activity in the third quarter ahead of seasonal deceleration at the end of the year. "Drilling activity declines have slowed, and we believe the rig count should find a bottom some time in the third quarter, but a significant inflection point in drilling seems further out," he said.

Herbert said rig count data dated back to 1987 shows the current U.S. rig count is 254 rigs, up from a trough of 244 rigs, which compares to a recent prior cyclical trough of 404 rigs in May 2016 and 488 rigs in April 1999. The recent peak rig count was 1,082 rigs in November 2018 versus the prior cyclical peak rig count of about 1,930 rigs in October 2014 and, before that, 2,026 rigs in November 2011.

"This is emblematic of what has been a reasonably durable trend of lower cyclical peaks and valleys over the preceding few cycles and could point to a permanent emasculation of the L-48 industry," he said Aug. 26.