Things are heating up for the oil services sector.

For an industry that typically benefits from a rising oil price, prospects for companies that support the oil majors with rig maintenance, equipment and specialist support has been rather lacklustre over the last couple of years. Oil service firms grappled with record fines related to bribery scandals, coped with extreme levels of indebtedness and a slow recovery in orders due to the oil crisis in 2015 and covid-19 crisis in 2020.

However, there are signs of life being breathed back into the sector. Results from the US firms Schlumberger and Halliburton in July showed a rebound in drilling activity in the US. Halliburton’s North American related revenue grew 55% from the prior year. Just this week, Aveva PLC, a UK business that provides software services to the oil and gas industry reported that Schneider Electric, their major shareholder, is in talks to purchase the remaining equity in the business.

Positive results in the US have been echoed by one of the UK’s leading oil service groups, Hunting plc [LON:HTG]. Issuing results on the 25th of August, Hunting H1 revenues leapt 37.7% to $336m from $244m the year prior. Gross profit swung from a -$44m loss in 2021 to a $76m profit in H1, feeding though to a slim adjusted operating profit of $1.7m up from a -$23m loss in 2021.

Jim Johnson, Chief Executive of Hunting said The Group’s results demonstrate a strong improvement in revenue and earnings in the period, leading to Hunting returning to monthly pre-tax profitability during the second quarter. The second half of the year is expected to see further improvement in earnings, which is supported by our forward sales order book, which now exceeds the position seen in 2019, providing a positive outlook for the remainder of the year and into 2023.

Strong revenue performance was driven primarily by increased activity levels in the US as the onshore rig count increased from 571 at the 2021 year-end to 733 at 30 June 2022. This led Hunting to put significant price increases through on many key products.

However, in the tale of two oil services groups, not all results were considered equal. UK listed Wood Group, reporting on the 23rd of August reported less than desirable results. Revenue compared to H1 2021 declined by 0.4% to $2,561m and Adjusted EBITDA fell 5.1% to $185m.

Also of concern, free cash flow was significantly impacted with the company posting negative FCF to the tune of $363m due to working capital expense and a $102m exceptional cost related to a serious fraud office fine.

Legacy issues also still hamper the UK’s largest oil support services group. Asbestos liability, Serious Fraud office settlements, and contract litigation such as the likes of Aegis Poland which has cost Wood Group $100m alone, continues to cast a cloud over the company, and that is before one notices balance sheet leverage is running at 4.2x net debt to EBITDA with interest rates on the rise.

For Hunting, a smaller yet nimbler operating structure has paid off, as the business which is focused predominantly on the supply of equipment to offshore and onshore oil rigs has been supported by an uptick in drilling activity. On the other hand, Wood Group, with its many divisions, global span and diversification across many parts of the hydrocarbon product cycle has faced a tougher operating environment.

Forecasts for the health of the oil services industry over the next year or so vary. In July, the Wall Street Journal reported that there is still 58% fewer oil rigs in North America than in 2014. Years of underinvestment from oil majors in both drilling platforms and capital equipment suggests we have a way to go before capacity is brought back in line with strong demand.

However, the oil price, the Bellweather for industry outlook has come down 20% since highs recorded in May earlier this year. This could signal an impending slowdown for oil production and possibly cloud the outlook for oil service groups.

Looking at the current dynamics for the oil services market, and results from Hunting plc this week, a glimmer of light does seem to be showing at the end of the tunnel for the industry. With a net cash position, a swing into positive operating profit, and a product line focused on supplying in-demand capital equipment to oil producers, Hunting looks like the best way to play a rebound in prospects for the oil services industry.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

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