Energy

UBS Says Huge Oil Merger Should Go Through: 3 Big Stocks to Buy

As we pointed out recently, despite the woes in the energy sector over the past year, when the Federal Reserve starts raising interest rates, the sector often is the leader over the next 12 months and even beyond. With the possibility of an interest rate increase as early as Thursday, and despite many lowering price deck levels for oil for this year and next, this could mark the beginning of a turnaround for the sector.

In a new report from UBS, outstanding oil services analyst Angie Sedita points that with the huge merger of Baker Hughes Inc. (NYSE: BHI) and Halliburton Co. (NYSE: HAL) on the line, several media sources indicated last week that the U.S. Department of Justice will require Halliburton to find a single buyer for the assets it will have to divest to secure approval for the deal. While this may not be the case, UBS has argued for some time that the Justice Department wants a “single viable competitor,” and the $4.0 billion to $5.5 billion price tag makes it a big ticket. UBS believes that GE and Siemens are in the final round and have the deep pockets to buy the entire package.

While the UBS lowers the price targets on the land drillers, the firm stays positive on the big diversified oil services companies, and three still make sense for investors with patience and a long-term outlook.

Baker Hughes

The company agreed almost a year ago to the 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, the company created innovative products like a rotary bit for drilling wells through rock.

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. The UBS team still thinks that there is a 90% chance the deal is completed, and while Halliburton has maintained it will close this year, they see a 2016 close more likely. They also think that additional assets could be sold by the company in an even greater effort to get approval.

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Baker Hughes investors are paid a 1.2% dividend. The UBS price target for the stock is $70. The Thomson/First Call consensus price target is $73.50. The stock closed Wednesday at $55.66.

Halliburton

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

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-term 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 Capital portfolio. It was also a new position added to Simon Sadler’s Segantii Capital hedge fund recently. Value buyers and bottom fishers are actively buying the stock at current levels.

Halliburton investors are paid a 1.95% dividend. The UBS target is $50, and the consensus target is $50.24. The shares closed Wednesday at $38.65.

ALSO READ: 5 Oil and Gas Stocks Analysts Want You to Buy Now

Schlumberger

This oil-field 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 and working in more than 85 countries, Schlumberger provides the industry’s widest range of products and services from exploration through production.

The second-quarter results actually were somewhat better than many on Wall Street expected. While Schlumberger did experience notable declines in both revenue and earnings, the results beat analysts’ estimates. Most of the decline in operating income and margin came from lower North American operations, particularly land activity. But global operations remained at least somewhat steady. 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.

UBS also notes that Schlumberger and the German equipment provider Bauer recently agreed to a non-binding letter of intent to form a joint venture for the development and construction of land rigs. Schlumberger has worked on a new land rig design for the past two years with Houston-based T&T Engineering, which it recently acquired.

Schlumberger investors are paid a 2.72% dividend. The $100 UBS target price is higher than the consensus target of $97.77. Shares closed Wednesday at $76.16.

ALSO READ: Is Kinder Morgan Undervalued?

Bottom line? 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 also will go higher, faster, when the market dog-piles the stocks once oil prices firm and turn around.

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