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Oil and gas drillers are on the verge of a worldwide spending spree not seen since 2013, teeing up a potential windfall for oilfield services companies, Morgan Stanley forecasts.
The bank believes a global upswell in capital spending on new fossil fuel production — one that will last for several years and is largely underappreciated — is just over the horizon. In Morgan Stanley's view, 2020 will be a year of synchronized growth in capital expenditures, and oilfield service firms will be one of the biggest beneficiaries.
This comes after oil giants and independent drillers slashed spending in 2015 and 2016 during an historic downturn in oil prices. The recovery has been relatively isolated to U.S. shale fields and a few international markets, but Morgan Stanley sees the rebound extending to many more parts of the world.
"Importantly, 2020 looks to be the first year the industry will experience material, synchronized capex growth since before the downturn," Morgan Stanley analysts wrote in a new research note.
After rising just 5 percent from the trough in 2016, capital spending is poised to increase by about 15 percent through 2020, Morgan Stanley says. In 2022, expenditures on finding and developing new oil and gas assets will rise by about 30 percent from this year to roughly $583 billion, the bank forecasts.
Morgan Stanley analysts believe Wall Street is underestimating the growth potential in three key areas.
The Street currently sees European oil majors like Royal Dutch Shell and Total holding capital spending roughly flat at about $80 billion in 2021. But Morgan Stanley believes these energy giants will actually increase spending to about $100 billion, or 25 percent above consensus.
The bank also thinks its peers underappreciate spending in the United States. The independent drillers that produce oil and gas from shale rock have pledged to return more cash to shareholders. However, Morgan Stanley thinks capital spending will still jump by more than 15 percent in 2020, once producers in Texas and New Mexico's Permian basin work through bottlenecks that are currently constraining output.
"We do not think US-focused service stocks are discounting the substantial activity increase and margin expansion this is likely to lead to," the bank's analyst said.
Lastly, Morgan Stanley believes growing Chinese demand for liquefied natural gas will mean supply and demand will balance out between 2020 and 2021. Currently, the broader market sees oversupply lasting through 2023-2024, according to the bank.
The supply shortage that Morgan Stanley forecasts means more developers will approve spending on terminals to export LNG, or natural gas super-chilled to liquid form for transport by sea.
In separate research note, Morgan Stanley upgraded its view of the oilfield services sector from "in-line" to "attractive." Its top large-cap stock picks in the space include GE's Baker Hughes and Halliburton. It ranks Nabors Industries and Transocean highest among small-cap equities.
Morgan Stanley warns that digitization in the oil and gas industry means service companies might have to sell leaner packages to drillers, and service firms with asset-intensive businesses could suffer as oilfields become more tech-oriented.