The energy tug-of-war continues, and one thing experienced investors know is that one day those who hold their nose and buy stocks now will have a well-deserved payback. The problem is, it is very possible that big payback may not come until late next year or even 2017.

A new report from UBS and the firm’s well-regarded oil service analyst Angie Sedita reminds readers that she and her team continue to believe that the sector will remain range-bound over the near to intermediate term as oil prices remain under pressure. She also makes the very astute point that oil prices can be very surprising, and despite the intense negative pall over the energy sector and oil services industry, this road has been traveled before.

The analysts at UBS have numerous stocks rated Buy, and they remain positive on land drillers versus offshore. We like the fact that they remain bullish on the big cap players that are diversified, and in many cases have a strong global footprint to compliment the North American business. All three of the following remain rated Buy at UBS.

Baker Hughes

Baker Hughes Inc. (NYSE: BHI) agreed almost a year ago to a friendly merger with fellow oil field giant Halliburton in a deal worth an astounding $34.6 billion. The tie-up between the two oil field giants raised big questions about whether the takeover could survive antitrust scrutiny, given the level of consolidation that it promises within the oil production services business. Created in 1987 with the merger of Baker International and the Hughes Tool company, Baker Hughes created innovative products like a rotary bit for drilling wells through rock.

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The long wait to get the deal done with Halliburton may be starting to grind on some, but the merger agreement does allow the two companies to extend the deal into 2016. There have been some reports that the deal is facing delays because of the complex nature of divestitures the U.S. Department of Justice (DOJ) will require in order to grant approval for the transaction and concerns that the company may not be able to find buyers strong enough to be viable long-term competitors to the major services providers. Despite the long delay, most on Wall Street feel comfortable the deal will be completed.

Baker Hughes investors are paid a 1.2% dividend. The UBS price target for the stock is $78. The Thomson/First Call consensus target is $75.60. The stock closed Tuesday at $56.95.
Halliburton

The stock is down almost 18% since May and could be offering the best entry price point since last January. Halliburton Co. (NYSE: HAL) now seems to be in the final stretch of getting the merger with Baker Hughes completed, as pointed out above, and the trick is to find the right buyers for the businesses that are required for the divestitures required by the DOJ.

The oil field giant announced last year a $1 billion investment to develop huge potential oil fields in Ecuador, and it has entered into a long-time deal with Petroamazonas, an Ecuador-based company involved in the exploration and development of the country’s oil reserves. With oil being absolutely demolished recently, this top oil service company is a great stock to buy on sale.

The company remains one of the top holdings in Jeffrey Ubbens $19 billion ValueAct Capitals portfolio. It was also a new position added to Simon Sadler’s Segantii Capital hedge fund. Value buyers and bottom fishers are actively buying the stock at current levels.

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Halliburton investors are paid a 1.75% dividend. The UBS target is posted at $60, and the consensus target is $53.80. The shares closed Tuesday at $41.07.

Schlumberger

This oilfield services behemoth rebounded smartly off the lows printed in January, but it has rolled over again as oil prices have weakened. Schlumberger Ltd. (NYSE: SLB) is the world’s leading supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide. Employing approximately 115,000 people, representing over 140 nationalities, and working in more than 85 countries, Schlumberger provides the industry’s widest range of products and services from exploration through production.

The company reported second-quarter results that actually were somewhat better than many on Wall Street expected. While the oilfield service giant did experience notable declines in both revenue and earnings, the results beat analysts’ estimates. Most of the decline in operating income came from lower North American operations, which is a bright spot as global operations at least remained somewhat steady. The deterioration in income and margin resulted from the company’s poor showing in North American land activity. With drilling picking up, and domestic rigs expected to be added this year and next, the prospects for the company look outstanding for patient investors.

Schlumberger investors are paid a 2.41% dividend. The $110 UBS target price is higher than the $102.06 consensus target. Shares closed Tuesday at $83.05.

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Bottom line? If you want to take an energy shot, do it with the big boys. If anybody survives this wicked downturn it will be the large-cap diversified leaders. They will also go higher, faster, when the market dog-piles the stocks once oil’s prices firm and turn around.

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