Energy

Huge Oil Sell-Off Is Opportunity to Buy 4 Companies That Should Survive and Thrive

Lee Jackson

Published: December 4, 2015 8:25 am

Last Updated: January 13, 2020 4:29 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.

Angie Sedita and her team at UBS have pointed out often 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

The company 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 Inc. (NYSE: BHI) has 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. UBS still thinks that there is a 90% chance the deal is completed, and while Halliburton has maintained it will close this year, UBS sees a 2016 close more likely. The firm also thinks that additional assets could be sold by the company in an even greater effort to get approval.

Baker Hughes investors receive a 1.27% dividend. The UBS price target for the stock is $70. The Thomson/First Call consensus price target is at $67.87. The stock closed Thursday at $52.62.

Halliburton

The stock is down over 20% 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 aforementioned merger with Baker Hughes completed, and the trick is to find the right buyers for the businesses that are required for the divestitures required by the Department of Justice.

The oil field giant announced last year a $1 billion investment to develop huge potential oil fields in Ecuador and 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 Ubbens $19 billion ValueAct Capital 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 1.9% dividend. UBS has a $60 target price, well above the consensus estimate of $46.37. The shares closed Thursday at $38.01.

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, and it 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 in check.

The company announced in August the acquisition of 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 gigantic 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 receive a solid 2.67% dividend. The UBS price objective is $100, and the consensus target is lower at $90.23. The shares closed Thursday at $74.81.

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, and that will translate to a reduction in annual operational costs of $803 million.

The UBS price objective is $15, while the consensus target is $12.46. Shares closed on Thursday at $10.66.

The oil services trade is still a contrarian one, to say the least. Oil seems to have hit bottom at the $40 level and hopefully will turn higher soon. 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.