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Stock Strategist Industry Reports

The Oil Services Industry's 3Q--A Fragile Recovery

We look back at the industry's third quarter and offer early thoughts on 2010.

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The oil services industry's third-quarter results were respectable considering the speed and violence of the downturn over the last year. In most cases, we saw some sequential improvement in North American revenue and margins, thanks to a 13% sequential gain in the North American rig count and a seasonal bounce in Canadian activity. Overall, we believe the North American recovery is very fragile, as near-term oil demand and natural gas supply issues can easily shatter it. Internationally, we also saw the expected margin deterioration, which was led by contract resets, and a challenging Mexican market. Mexico was particularly weak this quarter, as flooding in the Northern and Central regions of the Chicontepec field reduced activity levels as well as the number of highly profitable well completions. In addition, Pemex is considering reworking both existing contracts and future awards to modify the services companies' incentives toward boosting oil production after the Chicontepec field badly missed annual production targets. After reviewing the industry's third-quarter reports, we present our key takeaways.

Key Takeaways
First, North American services pricing has reached the bottom. Services companies and oil and gas companies have indicated the pricing declines have generally halted. Going forward, future cost savings for the oil and gas companies are largely expected to be driven by reducing drilling times, as opposed to price concessions from services providers. However, we do not see any catalysts for improved services pricing in the near term, which means relatively flat pricing for the next few quarters.

Stephen Ellis does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.