Sterne Agee believes that non-conventional and deepwater drilling will rise steadily over the next few years, and it encourages investors to have exposure to both trends via the highest quality names and in companies with specific catalysts.
Our favorites include Halliburton Co. (NYSE: HAL), Schlumberger Ltd. (NYSE: SLB) and Oceaneering International Inc. (NYSE: OII). Gengaro even named TETRA Technologies Inc. (NYSE: TTI) as its top pick among the small cap world in this trend.
The firm points out that the crude oil strip is currently in backwardization, a situation where future contracts are below current contracts, as a suggestion that oil prices could move lower over the next 12 months. Gengaro believes that West Texas Intermediate (WTI) crude prices will remain in a fairly stable range of $85 to $95 over the next two years instead.
Following an 8.2% drop in the U.S. rig count in 2013 to an average of 1,761, Gengaro is anticipating a roughly 3.6% rise in 2014 when you include both oil and gas rigs. He also believes this rig growth will accelerate in 2015, adding better trends for the services and equipment companies. The firm sees solid deepwater drilling visibility over the next several years.
Halliburton Co. (NYSE: HAL) is rated as Buy, with a $63 price target. The stock trades around $49.50 now, but the consensus price target on the stock is up at $65.30. This one has bought back major amounts of stock as well, and the 52-week range is $35.71 to $56.52. In another analyst call this week, Howard Weil also raised the rating to Outperform, with a $65 price target.
Schlumberger Ltd. (NYSE: SLB) is also rated as Buy and with a $110 price target. Schlumberger trades around $86.30 now, and the consensus price target is also right around $110.00. Be advised that the 52-week range is $69.08 to $94.91, and Schlumberger peaked around $110 back in the last energy boom in the 2007 to 2008 period.
Oceaneering International Inc. (NYSE: OII) is also rated as Buy, and Sterne Agee’s target price is $97. This represents huge potential upside from the $76.50 current price, and the consensus price target is close to Sterne Agee’s at $96.50. The 52-week trading range is $55.79 to $87.64. In a competing analyst call elsewhere this week, RBC Capital Markets raised its rating to Outperform from Sector Perform, with an $89 price target.
TETRA Technologies Inc. (NYSE: TTI) is the top sector pick in small caps, with a value of less than $900 million. At $11.22, Sterne Agee rates it at Buy, and the price target is $15. TETRA’s consensus price target is up at $14.62, and its 52-week range is $7.90 to $13.41. We would point out that Howard Weil just downgraded this one this week.
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