What you need to know: • We anticipate oil prices to remain within the US$80-$90 range, which will sustain the current uptick in E&P capital expenditure and foster a strong environment for oilfield services firms. • Our peer group continues to trade at deep-value multiples; currently at 4.5x/4.0x 2024E/2025E EBITDA. • We highlight a few of our favourite small-cap names that we believe have significant upside as we move into H2/24. Following our last oilfield services thematic note (published in January 2023, read here), we continue to be bullish on the industry based on the continued tightening of supply, rising capex levels for E&Ps, and dirt-cheap valuations. Investment Thesis Continued Tightening of Supply We will not go in-depth on oil price fundamentals in this report, however, we think the tightening supply of oil production as OPEC extends its cuts through Q2/24 and the remainder of the year as well as Russia continuing to voluntarily reduce oil production will maintain per barrel oil prices in the US$80-$90 range. This is considered a sweet spot for oilfield services firms to deliver strong profitability without dampening demand. It is expected that OPEC will continue to hold tight control on the production front, stabilizing prices well into 2025. Rig counts are currently 25% below the 10-year average with frac spreads slightly below the 8-year average (Figure 1,2,3). Rig counts dropped about 20% in 2023 after rising by 33% in 2022 and 67% in 2021, due to a decline in oil and gas prices, and high labour and equipment costs. In the first half of 2024, rig counts continue to fall, mainly in the U.S., continuing to tighten supply further. We continue to believe that large-scale electrification is still many years, if not decades away, and peak oil demand will continue into the 2030s. These factors create a compelling opportunity for investment in oilfield services as elevated oil prices and a tight supply environment are expected to sustain profitability and growth for companies providing critical support to the oil and gas industry. Rising Capex Levels for E&Ps While capital discipline has remained a key focus for E&Ps over the past few years, 2023 saw a 15% increase in capital expenditures among the largest E&Ps, with an additional 10% rise budgeted for 2024. This uptick is driven by sustained favourable market conditions and cash flow, incentivizing further exploration and production. Consequently, this trend is expected to foster a robust environment for oilfield services, characterized by higher utilization rates and pricing. Dirt-Cheap Valuation Our OFS universe trades at 4.5x/4.0x 2024E/2025E EBITDA on average, with the drillers trading at 3.9x/3.6x, pressure pumpers trading at 3.0x/2.7x, and equipment and other services trading at 5.9x/4.9x. With large-caps trading at a premium and small-caps at a major discount, we believe the small-cap players will see significant upside moving into H2/24 and FY25. We highlight a few of our favourites below including E, SDI, SHLE, TGH, and CVW.