There are five companies that dominate the oil field services industry, and all have a market cap above $10 billion. The five are Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), National Oilwell Varco, Inc. (NYSE: NOV), Baker Hughes Inc. (NYSE: BHI), and Weatherford International Ltd. (NYSE: WFT).

As a group, these five have performed reasonably well over the past two quarters, but expectations are high as drilling in the US for shale gas has risen dramatically and more exploration is expected in other hot spots around the globe. Following first quarter earnings reports, the implied upsides for these companies ranged from 20%-26%, a far cry from where those levels are today.

What could have happened is that costs are higher than analysts expected or that the anticipated demand for more drilling hasn’t materialized as quickly or that technical and other difficulties have stalled new drilling. Whatever the cause, the slowdown could mean either that analysts were overly optimistic about these stocks or that the companies have seriously underperformed.

Oddly, perhaps, some target prices have risen while share prices have declined between -15% and -25% since mid-April. Maybe optimism does deserve some of the blame.

Schlumberger Ltd. (NYSE: SLB) is the largest of the oilfield services companies by far and it could be looking to get bigger as it company issued $2.5 billion in new debt. The company could be prepping a shopping spree in Brazil in order to meet government requirements for local sourcing in the development of the country’s huge offshore fields. Shares recently traded at $72.35 and its market cap is $102 billion. The stock’s 52-week trading range is $56.61-$95.22. The current value is trading at a price-to-book ratio of about 3.2 to 1. Its forward price earnings multiple is 13.82. The company currently pays a dividend yield of 1.33% to investors. Thomson Reuters has a consensus price target of $112.23, implying roughly 54% upside to the most recent price.

Halliburton Co. (NYSE: HAL) expects growth in North America even as it also expects crude oil prices to decline. To try to gain some leverage on the work it now has, the company bought a chemical company earlier this week, and, like Schlumberger, is expected to go shopping in Brazil. Shares recently traded at $39.25 and its market cap is close to $38 billion. The stock’s 52-week trading range is $28.62-$57.65. The current value is trading at a price-to-book ratio of about 3.28 to 1. Its forward price earnings multiple is 9.13. The company currently pays a dividend yield of 0.87% to investors. Thomson Reuters has a consensus price target of $69.68, implying roughly 73% upside to the most recent price.

National Oilwell Varco, Inc. (NYSE: NOV) shares were upgraded from ‘hold’ to ‘buy’ and maintained a $90/share price target at Argus recently. This follows an upgrade from Credit Suisse in August to ‘outperform’ and a $95/share target. Shares recently traded at $63.00 and its market cap is $27.6 billion. The stock’s 52-week trading range is $39.31-$86.56. The current value is trading at a price-to-book ratio of about 1.64 to 1. Its forward price earnings multiple is 11.46. The company currently pays a dividend yield of 0.68% to investors. Thomson Reuters has a consensus price target of $98.23, implying roughly 56% upside to the most recent price.

Baker Hughes Inc. (NYSE: BHI) appears to be making a move to partner with smaller Chinese oil and gas producers as exploration in China heats up. The country is getting set to begin a push to explore for shale gas and oil, and companies like Baker Hughes with experience are well-positioned to profit. Shares recently traded at $57.50 and its market cap is $25.8 billion. The stock’s 52-week trading range is $38.51-$80.83. The current value is trading at a price-to-book ratio of about 1.72 to 1. Its forward price earnings multiple is 9.85. The company currently pays a dividend yield of 1.02% to investors. Thomson Reuters has a consensus price target of $96.00, implying more than 65% upside to the most recent price.

Weatherford International Ltd. (NYSE: WFT) has suffered from recent acquisitions by Schlumberger and Baker Hughes which have made those companies larger and Weatherford appear even smaller. The company had a record quarter in the second quarter and has been performing better of late. Like the other services companies, its implied upside has jumped dramatically in the last six months. Shares recently traded at $16.10 and its market cap is just over $12 billion. The stock’s 52-week trading range is $14.64-$26.25. The current value is trading at a price-to-book ratio of about 1.29 to 1. Its forward price earnings multiple is 10.05. The company currently pays no dividend to investors. Thomson Reuters has a consensus price target of $27.60, implying about 65% upside to the most recent price.

Implied upside running from 54% to 73% almost certainly does not indicate a value opportunity in the services business. Those price targets are simply too high for the near term and still have likely not come down enough from the July to August sell-off. There is simply nothing fundamental on the horizon to support those targets.

That said, the lowest implied upside and the best dividend yield show up in Schlumberger. That’s damning with faint praise perhaps, but optimism is no substitute for robust revenues and profits, both of which seem to remain just around the corner for these stocks.

Paul Ausick

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