What you need to know: • We expect oilfield service stocks to continue to outperform in 2023 and beyond based on supportive oil price fundamentals, rising capex levels amongst E&Ps, and pricing power leading to margin expansion • Despite the sector’s strong fundamental tailwinds and the probability for a multi-year commodity supercycle, oilfield service companies are still trading at trough-level multiples Investment Thesis Supportive Oil Prices While we will not go in-depth on oil price fundamentals in this report, we think the outlook for oil continues to be strong with China rapidly re-opening, OPEC cutting production, and the SPR (strategic petroleum reserve) reaching its lowest level since the 1980s. Even in a recessionary scenario in 2023, oil demand will remain resilient, declining only a few percentage points as seen in previous downturns. In order to end the oil supply deficit, additional rigs are required to be deployed; providing organic growth and pricing power for oilfield service names. Rig counts are currently 20% below the 10-year average with frac spreads slightly above the 8-year average (Figure 1,2,3), implying there is room to expand back to 2018 highs (40% higher). With large-scale electrification still many years (likely decades) away, peak oil demand is likely farther into the 2030s than most expect. These factors are creating a multi-year bullish environment where oilfield service companies can continue to add new rigs and increase pricing. Rising Capex Levels for E&Ps While capital discipline has been the main theme amongst E&Ps through the last year (i.e., returning capital to shareholders via dividends and buybacks), capex levels are still expected to rise in 2023 as the higher oil price incentivizes more exploration and deposits continue to become harder to reach. Consensus currently has large-cap Canadian E&Ps increasing capex by 15% in 2023, accelerating compared to 2022. Furthermore, the Canadian federal government’s $1.7B aid program for abandoned/orphaned wells will start taking effect in 2023, leading to even more rigs being deployed. We expect similar trends in the United States. This will provide a supportive environment for oilfield services where utilization rates and pricing can both continue to increase. Pricing Power The oilfield services market continues to be very tight, with customers not wanting to give up rigs in fear of not being able to secure a replacement. With supply chain issues preventing new rig deployments (i.e., labour and equipment), we expect the market to remain tight even with the supportive capex and oil price conditions. This will create another year of margin expansion for oilfield service stocks as they take advantage of operating leverage. Deep Value Multiples Our peer group currently trades at 4.3x 2023E EBITDA, well below the historical average multiple of 7-9x. We believe all commodities including oil will be in a supercycle over the next five years, and thus the oilfield service stocks are likely not over-earning based on 2023 numbers. We also are betting on a vast outperformance of value stocks in general and the continued adoption of oil and gas investing amongst generalists, providing justification for multiple expansion through the supercycle.