Oil Contractors Face Profit Hits From Mideast War Fallout

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(Bloomberg) — The fortunes of the world’s largest oil contractors are dimming as fallout from the Iran war clouds prospects for a Mideast drilling and fracking boom.  

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Analysts have been cutting per-share profit forecasts for the three largest oilfield-service companies since shortly after the conflict erupted in late February. When management teams begin presenting quarterly results this week, investors will be listening for details on the war’s impact on things like rig activity and crew disruptions, according to RBC Capital Markets analyst Keith Mackey.

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The US-Israeli offensive against the Islamic Republic has thrown the broader region into disarray, triggering the most severe oil market upheaval in history and upending entire industries and economic forecasts around the globe. 

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For oilfield contractors, the crisis has been particularly acute because the sector was counting on the hydrocarbon-rich region for a resurgence in orders as the the North American shale sector matures. 

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“It could be that the Middle East returns to some level of activity but has risk of further disruption, and investors may not want to have exposure to that,” Marc Bianchi, an analyst at TD Cowen, said during an interview. “Or maybe we get a resolution, and we’re back to where we were before.”

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Investors already are rendering a verdict of sorts on how the sector responsible for mapping, drilling, assessing and fracking crude and natural gas fields for energy producers will weather the conflict.

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Halliburton Co., which is scheduled to report results on April 21, has advanced roughly 3% since the war kicked off on Feb. 28. That’s lagged the 34% surge in international crude futures during the same period.

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Meanwhile, Baker Hughes Co. has fallen more than 8% while SLB is up less than 3%. Those companies are scheduled to disclose quarterly results on April 23 and 24, respectively. 

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As recently as early February, oilfield executives were optimistic about the prospects for a rebound in Middle East drilling and fracking orders. But the onset of war has them now contending with unexpected challenges such as ballooning shipping costs and physical risks to workers and infrastructure.

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And even when the conflict is resolved, the industry may be faced with significant delays in ramping back up to pre-war activity levels. 

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“In the near term there’s definitely going to be some corrections to the numbers in the second quarter, particularly those with Middle East exposure,” David Anderson, an analyst at Barclays Capital Inc., said during an interview.  “There’s definitely higher costs, so you’ll see some margin degradation, no doubt.”

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SLB, the world’s largest oilfield contractor, is more exposed to Mideast convulsions than its peers because it reaps such a significant chunk of revenue from the region. 

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Baker Hughes also is highly dependent on Middle East customers for sales, according to TD Cowen’s Bianchi. 

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“If the customer reduces activity the service company suffers, regardless of the reason,” Bianchi said.

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