A new research report from UBS reviews the second-quarter numbers from the oil service sector, and needless to say, they are impressive. They point out that the frac markets continue to tighten, with an estimated 10% to 15% in excess capacity today, down from 20% to 25%. The analysts also see prices going higher as the market becomes tighter.
The UBS team recommends that at this juncture, after a very good market run, investors should stay with the top diversified names. They have domestic and international business, and the size and scale to cope with demand and pricing changes.
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Baker Hughes Inc. (NYSE: BHI) reported very solid numbers for the quarter but some analysts were disappointed by its margin guidance. The company maintained guidance of 15% North American margins for the fourth quarter of this year. While slightly below peers, the company should still produce attractive number for investors. Baker Hughes pays investors a very small 0.9% dividend. The UBS target price is $83. The Thomson/First Call estimate is at $84.67. The shares closed Wednesday at $68.17.
Halliburton Co. (NYSE: HAL) flexes its muscle and remains a top stock to buy. The company now leads peers with North American margins of 18.2%. The company also plans to increase its allocation for its operations in North America. The other consideration for North American operations is to reduce costs as it becomes increasingly profitable in this region; this is what is helping to drive the strong margin growth. Investors are paid a 0.9% dividend. The UBS price objective is $87, and the consensus target is $82.65. The stock closed Wednesday at $67.96.
Schlumberger Ltd. (NYSE: SLB) is the largest oilfield services company in the world, with far reaching operations all around the globe, and it was recently added to the UBS Equity Focus List. It could be poised for years of solid growth. UBS and 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 in 2014, and that should continue into next year. Investors are paid a 1.5% dividend The UBS price target is $140, and the consensus target is lower at $132.57. The stock closed Wednesday at $107.57.
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Weatherford International Ltd. (NYSE: WFT) has been a frustrating stock for many investors over the years, and it finally rewarded investors with a solid first half of the year, highlighted by solid growth and cost-cutting. The company has had a strong move off the January lows and looks to break out and go higher. Weatherford offers 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 may provide some favorable tailwinds for the company. UBS likes the prospects and has a $30 price target. The consensus target is $26.22. Weatherford ended Wednesday at $21.63.
Despite a very impressive move this year, the price targets for all these top stocks to buy offer solid upside for investors. The recent sell-off has lowered the cost on most of these stocks, and scaling some capital in now may make good sense.
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