The number of oil and gas drilling rigs in the U.S. is down by 188 at last count, with gas drilling rigs down by 514 and oil rigs up by 331. The overall decline in rig count is expected to have a negative impact on field services companies Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI).

Halliburton is expected to report quarterly results tomorrow, and the consensus estimates from Thomson Reuters call for earnings per share (EPS) of $0.67 on revenue of $7.14 billion. With a share price today of around $34.60 and a consensus target price of about $43.40, the implied gain on Halliburton’s stock is 25%.

Schlumberger is expected to report on Friday, and the consensus estimates call for EPS of $1.06 on revenues of $10.7 billion. With a share price today around $73.50 and a consensus target price of $88.42, the implied gain here is 20%.

Baker Hughes also reports earnings on Friday, and the consensus estimates call for EPS of $0.84 on revenues of $5.45 billion. With a share price today of around $45.60 and a target price of about $54.20, the implied gain on Baker Hughes shares is 19%.

The fly in the ointment for these firms is rig rates. Exploration & production companies can — and are — driving hard bargains because they know that the services companies need to keep their rigs working and are willing to offer steep discounts to do so. Falling day rates could have an impact on services firms for some quarters to come as gas producers hold back waiting for prices to rise.

There are other elements at work as well. Companies with offshore operations, like Schlumberger, stand to perform better than the land-based outfits like Halliburton and Baker Hughes. Companies like Halliburton and Baker Hughes, which also rely heavily on fracking services, could suffer double trouble over the next few quarters. And both Halliburton and Baker Hughes are primarily North American-based, unlike competitor Schlumberger which has a more international scope.

Schlumberger, with its implied gain of 20%, looks to be the best choice for a value play in the services sector. And as of today, the Philadelphia Oil Service Sector index is up 1.8%, and every one of the 15 companies on the index is holding a gain. Schlumberger is the “loser,” with a gain of just over 1% today, while Baker Hughes is up 1.5% and Halliburton is up 2.3%.

The Market Vectors Oil Services ETF (NYSEMKT: OIH) is up 1.6% at $40.50 today, in a 52-week range of $32.54 to $45.14.

Paul Ausick

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