Highlighting Top Picks in the Energy Services Sector.

Within Energy Services, we see 2024 to be a stock picker’s market, and expect outperformance from companies that have minimal cyclical US-exposure, high cash-return to shareholders profiles, and “Alpha'' opportunities.

Our top picks for 2024 are EFX-T, FTI-N, NOV-N, TCW-T, and TOT-T. We expect the energy service sector to see an expanding revenue opportunity in 2024, with international/offshore growing by low-double digit percentages, Canada increasing by mid-to-high single digits, and the US market flat to down mid-single digits. Therefore, we recommend minimizing US cyclical exposure, at least during H1/24, and maximizing exposure to international/offshore, followed by Canada.  

Focus in H1/24 Will Be on Slowing US Production Growth, Even as Long-Cycle Investments Continue
We enter 2024 with WTI at ≈US$70/bbl and HHUB gas price at ≈US$2.50/mcf. Rising US oil production (+1.0mmbbl/d y/y ytd) offset the impact of OPEC+ voluntary cuts for Q1/24, negatively impacting the oil macro. US production rose in 2023, despite a nearly 20% cut in US active rigs and pumping crews. As a result, we believe downside risk exists to the consensus view of rising US D&C activity in H1/24, and any sequential improvements will likely be modest at best. We further reduce our US rig activity forecast, and now project only a 30-rig increase between Q4/23 and Q4/24. Given the downside risk to the US outlook, we see downside risk to US cyclically levered companies including HAL-N, HP-N, NINE-N and NBR-N; as such, we downgrade HAL-N and NBR-N to Sector Perform, and lower the PT for several US cyclically exposed companies, PUMP-N being the exception.  

Top Picks for 2024

We emphasize three themes: 
(1) Growth:  Our top picks FTI-N and NOV-N offer high leverage to the high-growth international/offshore markets. They offer the highest 2023e-2025e EBITDA CAGR of +41% and +19% in the peer group, 

(2) Strong Cash Return to Shareholders: FTI-N, NOV-N, TCW-T and TOT-T are expected to increase cash return to shareholders. NOV-N will likely initiate a share buyback program in February-2024; TCW-T is likely to increase quarterly dividend per share by 6%-13% in Q1/24, while buying back 10% of shares outstanding; and TOT-T has ample capacity to increase distributions and maximize its share repurchases in 2024. 

(3) “Alpha”: Following FCF bleed in seven out of the past eight quarters, NOV-N should see a FCF inflection in Q4/23 and throughout 2024, with FCF increasing from an outflow of $264mm in 2023e to positive FCF of $724mm in 2024e. TOT-T’s discounted valuation (1.6x 2024e EBITDA) strong balance sheet and upside to shareholder returns offers opportunity for a rerating, while we believe EFX-T has been significantly oversold and remains well-positioned for strong FCF generation and deleveraging in 2024 which could catalyze a rerating, in addition, EFX’s exposure to US gas production growth offers upside across our forecast horizon.    

Other Ideas For 2024e: 
On the theme of debt reduction in 2024, we highlight AKT.AT, EFX-T, ESI-T, and PD-T as they should be able to pay down substantial debt in 2024, transferring value from debt-holders to equity-holders.