With crude oil prices hovering around $90/barrel, exploration and production companies are expected to increase their spending in 2011 by about 11%, for a total of about $490 billion. Oil field services companies can’t wait for the new year to start.  Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), National Oilwell Varco, Inc. (NYSE: NOV), Baker Hughes Inc. (NYSE: BHI), and Weatherford International Ltd. (NYSE: WFT) are leading candidates to benefit from the growth in exploration. A survey by Barclays Capital indicated that the chief areas of interest will be emerging markets in Latin America, the Middle East and North Africa, and Southeast Asia.

To say Barclays likes the oil field services sector is an understatement: “Given our strong growth expectations for the oil service and drilling industry relative to the global economy over the next two to three years, we believe the oil service stocks should command a considerable premium to the market.” That pretty well sums it up.

E&P activity in the US is expected to concentrate on conventional oil plays and the liquids-rich shale gas plays. With natural gas prices stuck at around $4/thousand cubic feet, producers are chasing the liquids which command a high enough price to pay for all the drilling. The liquids-rich gas plays in the US are the Eagle Ford shale in south Texas and the Bakken play in North Dakota and Montana.

Another wild-card in the services business is the acquisition of Wellstream Holdings PLC by General Electric Co. (NYSE: GE). GE has long supplied equipment to the oil field services companies, but this is its first go at competing with them. How serious GE is about competing in this sector could come into focus if or when it makes a bid to acquire another company. But even GE is unlikely to buy any of the five companies we’re looking at here.

Here’s a short table showing the tickers, the current price, the mean target price from Thomson Reuters, the implied upside to that target, and the 52-week trading range. We’ll have some comments on these companies following the chart.

Stock	Current	Mean Target	Implied Gain	52-week Range
SLB	$83.36	$88.10	5.69%	51.67 – 84.11
HAL	$41.01	$49.27	20.14%	21.10 – 41.73
NOV	$66.89	$67.86	1.45%	32.18 – 67.15
BHI	$56.82	$61.32	7.92%	35.62 – 57.18
WFT	$22.74	$23.19	1.98%	12.34 – 22.98

Schlumberger’s current P/E ratio stands at 25.35 and its forward P/E is set at 22.05. Those are rich numbers and reflect the fact that the boom in drilling next year has already been priced into the stock. The company’s stock has jumped nearly 30% in the past year and set a new 52-week high earlier this week. The company swallowed competitor Smith International earlier this year and its fluids business is among the best in the sector. And fluids, which are used in the hydro-fracturing process of developing shale gas reservoirs, are likely to be in very high demand in 2011.

Halliburton shares have jumped more than 35% in 2010. The company’s P/E ratio sits at 25.30 and its forward P/E is a more modest 14.97. Halliburton could also benefit if Mexico’s Supreme Court ruling to allow the national oil company to contract with private companies is not legislated away. Halliburton (and other service companies) already have limited services contracts in Mexico, but the recently approved ‘integrated service contracts’ would offer larger payments and guarantees.

National Oilwell Varco’s P/E ratio is 17.27 and its forward P/E is 17.89. That seems about right because the company’s share price has risen more than 50% in 2010 and set a new 52-week high yesterday. Once again, the positive outlook for the entire industry is boosting National’s share price. Other than that, National doesn’t seem to be offering much. It’s implied gain is the lowest among the five companies we’ve looked at and its forward P/E is not highlighting any significant growth.

Baker Hughes has seen its shares rise about 40% in 2010, and it too set a new 52-week high yesterday. The company’s P/E ratio is 36.97 and its forward P/E is less than half that, at 17.48. There is some implied upside in Baker Hughes shares, but not enough to push the shares much higher.

Weatherford’s shares appear to be way over-valued. According to Yahoo Finance, the company’s P/E ratio for the trailing twelve months is 355.31 and its forward P/E is 18.34. Even if the P/E is off by an order of magnitude, that still values Weatherford pretty richly. Like National and Baker Hughes, Weatherford is getting a boost from the outlook for the entire industry.

The best stock for 2011 is Halliburton. The share price target of $49.27 is below Halliburton’s highest share price ever, above $52/share in June of 2008. The company is strong in Mexico and that could be its most significant asset in 2011.

Another way to play the services stocks is with the Oil Services Holdrs ETF (NYSE: OIH). Like many of the services stocks themselves, OIH set a 52-week high yesterday and has appreciated almost 20% in 2010.

Paul Ausick

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