Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
President Donald Trump unveiled a broad new tariff plan. The plan calls for a 10% baseline tariff on all imports. China will face higher tariffs. The Organization of the Petroleum Exporting Countries and partners, or OPEC+, will also raise crude production by 411,000 barrels per day in May.
Why it matters: Tariffs adversely affect oil prices over concerns from a weaker economic outlook. Increased oil production also exerts downward pressure on oil prices. Oilfield services firms depend on capital spending from producers, and oil prices influence these spending decisions.
The bottom line: We lower our fair value estimates for the Big Three oilfield names by 3%– 6%. The Big Three includes narrow-moat-rated Schlumberger SLB and Halliburton HAL, and no-moat-rated Baker Hughes BKR. Still, SLB and Halliburton each trade in deep 4-star territory.
We lower our fair value estimate for narrow-moat Halliburton to $34 from $36. Halliburton’s greater sensitivity to short-term commodity prices also prompt us to raise its uncertainty to High.SLB and Baker Hughes face smaller valuation headwinds. We lower our fair value estimate to $52 from $54 for SLB, and $43 from $44.50 for Baker Hughes. SLB’s revenue comes from more-resilient sources, while Baker Hughes benefits from a favorable business mix.
Between the lines: The Big Three could see 2%-3% less oilfield revenue in 2025. But services firms are also fixed cost-heavy businesses. For each dollar lost in revenue, we estimate the Big Three could see $1.25–$1.35 in lost operating profit.
We assume that a $5/bbl decrease in oil prices translates to only a 1% decrease in international spending. By contrast, we think the same oil price drop means a roughly 5% decrease in US shale spending. These dynamics help SLB relative to Halliburton.Baker Hughes’ services offerings are less moaty than SLB’s. Still, Baker Hughes is more resilient than SLB because its industrial business should command pricing power, especially given its liquefied natural gas exposure.
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