OFS: Insight Downhole
EARNINGS
Not letting go of the rebound; Services post Q4
Diversified service company earnings were left to fall hard for 2009. EPS for
2009 was guided lower (if not to a specific number) by the six diversified service
companies through Q4 earnings. Following our revisions, we are modeling the six
with an average of 44% EPS decline yr/yr in 2009 on a 19% decline in revenues. We
lowered rig count expectations for 2009 as well – we are now looking for an average
of 1,270 in 2009 (down 32% yr/yr). We are also now forecasting the non-NAM rig
count to average 1,005 in 2009 (down 7% yr/yr).
Conviction regarding a recovery is guiding action, however. We heard
headcount and capex reduction plans tempered by the desire to be prepared for a
recovery and by longer term infrastructure build-out. Hard to calibrate the impact, but
on the margin that suggests more margin downside near term.
Our picks within the six have different theses. We favor (1) WFT due to expected
revenue outperformance, even through the downturn (the negative: we suspect
there will be a better entry point post Swiss redomestication); (2) SII due to FCF
edge versus peers ($4.39 per share in ‘09E versus peer average of $0.90) (the
negative: modestly greater earnings decline expected in ‘09E and the fact that it
seems somewhat less well positioned geographically or in bundling capability); and
(3) BHI due to favorable (i.e. defensive) product positioning and LAM growth
potential (the negatives: (a) we sense that some oil company customers are pointing
to pulling back on existing field spending, which sounds less encouraging for
production-related products/services than oil service companies themselves and (b)
selling/service infrastructure is less well established internationally).
We remain short term neutral on oilfield services. We continue to believe
optimism about 2010 runs through oil service bull theses, although risks to that case
are being more widely discussed. With YTD outperformance in more defensive
names it becomes harder to see pure long opportunities very near term and we look
to get more aggressive with trading ideas on pullbacks.
What we’re listening for at Vail. Credit Suisse hosts our Energy Summit this week.
We expect our companies to be somewhat less bearish than their oil company
customers about then length of a slowdown and we’ll try to understand that
difference. We’re also listening for more color on margin trajectory, acquisition
opportunities/landscape, project delays, and pricing pressure.
Please note: this piece includes much of our normal weekly data. Our earnings
recap and 2009 changes discussion is on pages 2-9; text summary of the weekly
data is on pages 10-11; and our standard weekly exhibits is on pages 12-39.

Q4 and 2008 earnings recap
The oil patch didn’t freeze up. Relative to what we suspected might have happened in
Q4, oilfield spending was, frankly, more normal. We thought we might have seen less of
year-end budget spending, but HAL’s results (and to a lesser degree BHI’s) suggested
otherwise.
There were soft spots, though, and currency weight. The North Sea and Russia did
show signs of weakness and currency impacted USD reported results. The
Europe/Asia/CIS region was the only region to show a sequential revenue decline on
average across the diversified service names (we’ve excluded SII from these analyses
because of WH), down 5% (please see exhibit 1 for all product and geographic revenue
and margin discussion).
Currency weight in Q4 2008 (some carry through to Q1 20009). Currency specifically
impaired EPS by roughly $0.03-$0.04 across the companies (all reflected primarily in
revenues). YTD2009, the major currencies that caused the weakness in Q4 have largely
stabilized – the Brazilian Real has weakened by 1% versus Q4 averages and the Euro has
strengthened by 2%, although the British pound has fallen another 6%.
Wham bam, thank you LAM! Latin America (LAM) kept its place as fastest grower in
2008, with revenues up 9% on average across the companies sequentially in Q4 and EBIT
margins up 100 bps. For comparison, Europe/Africa/CIS revenues fell 5% and margins fell
90 bps and Middle East/Asia revenues rose 2% and margins fell 20 bps. For all of 2008,
LAM revenues grew 30% versus 17% for Europe/Africa/CIS and 19% for Middle East/Asia.
A lot of consistency across product growth in 2008. We take the diversified services
results and use some discretion in terms of which to include/exclude in the analysis
(largely excluding if a company’s market share is too small). We think the range in product
growth in 2008 of 13% on the low end (bits) to an estimated low 20s% on the high end
(directional drilling) is tight relative to recent prior years (for example, in 2007 the
estimated range was 10-11% for wireline to high 20s% for directional drilling and
completions. There are a few factors behind this, we imagine:.
• Slowing of rig count gains in the U.S. and pricing impact. With the rig count
growth slowing to 6% in the U.S. in 2008 off of an already plateauing 7% growth
in 2007, and tool capacity rising, pricing pressures in H1 2008 weighed on results
in some product lines
• Investment in tool manufacturing capacity (internationally) helped lift, for example,
wireline sales to 18% growth in 2008 (versus 9% in 2007), although this was in
part helped by less yr/yr pressure in Canada for WFT.
• Bundling helped lift some products. We credit growth for SLB, HAL and WFT in
part to bundling of products and services in a combination of traditional and to a
lesser extent turnkey services. We have come to accept (as have the companies
by and large) that a capacity to bundle is very important, i.e. that customers are
accepting the value proposition that bundling adds efficiency and/or efficacy
• Production-oriented activities (artificial lift and chemicals both up 18%) maintained
a steady growth pace. We think this is indicative of the production enhancementoriented
requirements of the aging oilfield.

2009 Outlook
Lowering rig count forecast. We have lowered rig count expectations for 2009 as part of
our lower numbers – we are now looking for a trough BHI U.S. rig count of 1,160 in Q3
2009 (down 43% from the peak week in September 2008) and an average of 1,269 in
2009 (down 32% yr/yr) (see Exhibit 2). Within the U.S. rig count, we expect a service
intensity adjusted rig count (which credits horizontal wells for greater service intensity) to
fall 32% peak to trough and to average 22% lower yr/yr (see Exhibit 3). We are also now
forecasting the non-NAM rig count to average 1,005 in 2009 (down 7% yr/yr).
Lowering 2009 Estimates. We have lowered our service company earnings outlook
through this past week. EPS is now expected to fall 44% on average on a 19% revenue
decline. Oilfield margins are declining an assumed average of 530 bps (see Exhibit 4).
Tying our revenue assumptions to rig count. We are assuming NAM revenues for
these diversified service companies decline 30% yr/yr (see Exhibit 5). This is intended to
be consistent with the service intensity-indexed rig count decline and high single digit %
average pricing decline. We are assuming non-NAM revenues decline 12%, with LAM
down 4%, Europe/CIS/Africa down 16% and Middle East/Asia down 12%.
Variance across products. Unlike 2008, we are assuming broad variance in revenue
decline by product. We assume production oriented products see much less revenue
decline (we are modeling production chemicals and artificial lift to be essentially flat versus
e.g. U.S. coiled tubing down 40%) (see Exhibit 5).
Yet we assume more consistency than this in EPS declines. Given the product spread,
one would conclude there are wide revenue and EPS variances across these companies.
The range tightens up, however, when other items are factored in. In WFT’s case, higher
interest expense weighs on EPS (but EBITDA is expected to fall half as much as peers).
For BHI, higher corporate expenses offsets relatively more resilient product positioning.
And to a degree we reflect the impact of bundled/IPM services on 2009 business
outlooks. IPM or bundled business is not immune from spending pullbacks – integrated
projects are showing some signs of slowing their pace (Manifa being the now tired
example). But examples of potential growth include: Mexico seems likely to add
incremental turnkey project work in 2009 (the public capex budget of $19.4B is up 8%
yr/yr); there is a confidence that natural gas-oriented projects in Saudi help offset the
slower pace of oil development; and Petrobras has awarded bundled packages of drilling
services that are likely to step up in 2009 given the new rigs expected to start up in that
market by year end.
We also have some bias in for our perceptions of market attitude – although most of the
firms speak to not wanting to give up share, we believe SLB moves the most aggressively
among the big three to gain share; and we in effect model WFT gaining share through its
still better than average revenue results.
Cost savings outlooks. SLB (-5,000 employees) and BHI (-1,200 employees) have been
public about cost reduction plans; WFT spoke to “permanent” cost reductions in the U.S.
The others were more circumspect about plans and we sensed it is an ongoing process,
with potentially multiple stages of cuts through the course of the year.
Capex and Cash Flow. The service companies by and large struck a “still building for the
future” tone when it came to capex -- budgeted capex is down only 11% yr/yr if we exclude
WFT (which has said it will cut capex by 50% in 2009). To some extent capex is being
propped up by current commitments. Service companies do expect to bring in cash by
lowering working capital commitments through the year as activity declines. We sense that
we have been conservative on this across all six of our names. On our estimates, we
expect SII to generate considerably more cash per share than peers -- $4.39 versus a
peer average of $0.90 (see Exhibit 4).