Energy

Despite Oil Rally, Only the Strong Will Survive: 4 to Buy Now

Lee Jackson

Published: November 5, 2015 10:05 am

Last Updated: January 13, 2020 5:31 pm

If there has ever been a boom-to-bust sector over the years, it has been energy. Despite all the past lessons learned, the same mistakes continue to be made when times are good: overproduction, too much leverage and too much capital expenditure spending.

A new research report from the highly respected Angie Sedita and her team at UBS points out that drilling has slowed to the lowest pace in years, and now is not the time to speculate on shaky companies. The stocks rated Buy at UBS are all the sector leaders.

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 deal 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.

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. UBS still thinks that there is a 90% chance the deal is completed, and while Halliburton has maintained it will close this year, the analysts 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.

Baker Hughes investors receive a 1.25% dividend. The UBS price target for the stock is $70. The Thomson/First Call consensus price target is at $73.50. The stock closed Wednesday at $51.56.

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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 mentioned above, and the trick is to find the right buyers for the businesses that the U.S. Department of Justice requires be divested.

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 over the past year, this top oil service company is a great stock to buy on sale.

The company remains one of the top holdings in Jeffrey Ubben’s $19 billion ValueAct Capital’s 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.

Halliburton investors receive a 1.8% dividend. The UBS price target is $60, and the consensus target is $53.80. Shares closed Wednesday at $39.21.

Schlumberger

This is hardly a company that many investors would view as a value stock, but given the debacle in the energy sector over the past year, the decline in share prices has pushed it almost to value levels. Schlumberger Ltd. (NYSE: SLB) remains the largest oilfield services company in the world for now, with far-reaching operations all around the globe.

Schlumberger could be poised for years of solid growth, despite the huge turn down in oil pricing. Jefferies and a host of other Wall Street analysts think the company will continue to drive margins on execution, technologies and efficiencies. Russia, Saudi Arabia, Iraq and China are expected to be the strongest markets, if geopolitical concerns remain somewhat in check.

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The company announced in August it was buying oil field services giant Cameron International in a deal expected to cost about $12.7 billion in cash and stock. Wall Street analysts note what they term the company’s “drive to disrupt the status quo,” which includes transformation initiatives like the purchase of Cameron. They actually raise the price target and forward estimates as they see lower capital needs. Trading at a low 6.6 times the firm’s normalized EBITDA estimates, the stock looks cheap.

Schlumberger investors are paid a solid 2.56% dividend. The $100 UBS price objective is higher than the consensus target of $89.84. Shares closed Wednesday at $80.31.

Weatherford

Weatherford International Ltd. (NYSE: WFT) has been cut almost 50% since the highs the stock printed last summer, and it was forced to cut 8,000 jobs back in early February, almost 15% of the company’s total workforce. The company still offers customers a wide range of global capabilities, including a proprietary system for pressure management in the mushrooming arena of subsea production. The changes in government oil policy in Mexico last year may provide some favorable tailwinds for the company, despite the huge downturn in oil pricing.

One of the ways that Weatherford has continued to stay relevant after over a year of declining crude prices, and capital expenditure slowdowns from customers, is by lowering corporate costs. According to management, the company has now reduced its workforce by 11,000 employees in 2015, which will translate to a reduction in annual operational costs of $803 million.

The UBS price objective is $15, and the consensus target is $12.39. The stock closed on Wednesday at $11.25.

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The oil services trade is still a contrarian one, to say the least. Oil seems to have hit bottom and turned higher, and that’s a plus. The pain in the industry is not going away anytime soon, so sticking with the top names that weathered downturns before makes the most sense.