Energy Services Outlook 2025

We enter 2025 with a tenuous commodity price outlook, especially for oil, and although gas prices have recovered, NOAA’s forecast of warmer than normal winter gives us some pause. Nonetheless, a bullish medium to long-term secular growth outlook is developing for natural gas (here). We view 2025 to be a transition year, with upstream spending slowing, and expected to be down low-to-high single digit percentage in the US, be flat-to-up low-single digits in the international markets, and grow by low-to-mid single digits in Canada. This is hardly a market where macro tailwinds support service stocks, rather this should be a stock picker’s year.

Our top picks ACX, ESI, FTI-N, PD, and TOT emphasize themes that have worked: (1) High-Confidence Sector Leading Growth: Our top picks on the theme are FTI-N, ACX and TOT who offer sector leading 30%, 30% and 19% EBITDA/EBITDAS growth in 2025. (2) Positive inflection in cash return to shareholders: Although many service stocks should increase shareholder-friendly capital allocation in 2025, we see the biggest positive inflection for top picks ACX and PD. (3) Restructuring: While a major shareholder-friendly corporate restructuring is unlikely, we do expect ESI to fundamentally improve its capital structure by paying off debt equaling 50% of its market capitalization. All our SMID picks have Canadian exposure, and benefit from recent C$ devaluation relative to the US$, and higher upstream spending growth in Canada versus the US. We downgrade from OP to SP, SLB-N and NOV-N for their high exposure to slowing international markets, and BKR-N and CEU on valuation following their ytd outperformance. We upgrade LBRT-N from SP to OP, owing to leverage to the secular growth in US natural gas and power markets, although we acknowledge near-term headwinds for LBRT-N. We also raise CFW from SP to OP on sharply rising FCF owing to capex reductions and improved collections in Argentina.

Highlights:

1. Key Changes to Assumptions:(1) We have marked to market our Q4/24 commodity price assumptions, and have also slightly lowered our 2025e WTI outlook to US$70/bbl (Previous: US$72.50/bbl). (2) We are keeping our Canada/International rig count assumptions unchanged, but trim our 2025 US rig count assumption, and now expect a 2% y/y decline, although now expect higher y/y increase in US rig count in 2026 and 2027, given our more optimistic outlook for natural gas activity. (3) We have adjusted our estimates and target prices for a number of companies, and given our more optimistic medium-to-long term natural gas outlook, we raise target multiples for gas leveraged stocks, while lowering our target multiples for companies with substantial international exposure.
2. Positive Medium-to-Long Term Outlook for Natural Gas Activity: We expect NAM’s natural gas demand to increase by 20bcf/d (risked) or by 35.6bcf/d (unrisked) by 2028-2030, necessitating an increase of 70-80 rigs and 25-30 fracking crews (here). We highlight EFX, PD, PTEN-N, LBRT-N, PUMP-N, and TCW on the theme, though acknowledge that pumpers, especially, face near-term headwinds with pricing and utilization pressures in Q4/24 and for 2025. However, we point out their attractive valuation and their solid medium to long-term upside. We recommend patient investors to build long positions in these names on weakness. Our upgrade of LBRT-N is driven by the theme of secular growth in natural gas and power demand.

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