Oppenheimer believes that in the long run oil prices are unsustainable at these levels, and there are several catalysts that could present negative headwinds over the next several weeks, such as refinery turnaround season, which could pressure oil prices, bank redetermination season, which could constrict capital and then activity, and exploration and production hedge books rolling off.

The fourth quarter is likely to be worse, considering the seasonal challenges. Despite the doom and gloom, Oppenheimer points out that many oilfield service stocks are trading at or near 10-to-20 year lows on the price to book ratio. The firm continues to favor the large-cap diversified service names, as well as companies with strong balance sheets, asset support and free cash flow generation.

The Oppenheimer top picks within this sector include Halliburton Co. (NYSE: HAL), Schlumberger Ltd. (NYSE: SLB), Weatherford International PLC (NYSE: WFT), Superior Energy Services Inc. (NYSE: SPN) and Bristow Group Inc. (NYSE: BRS).

Oppenheimer believes Halliburton will conduct a large share repurchase after the close of the merger with Baker Hughes. The firm expects the company to largely finance the about $8.3 billion cash portion of the deal and reap around $6 billion in proceeds ($4 billion to $4.5 billion from Sperry and drill bits and $2 billion to $2.5 billion from recently announced drilling and completion equipment) before taxes from divestments. Using a ceiling of 40% debt to capital, the firm estimates Halliburton could repurchase $3 billion to $6 billion of stock in the first half of 2016 in potentially another Dutch auction.

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Despite the recent market carnage, Oppenheimer believes pricing has held up fairly well. However, another leg down in the rig count could cause another dip in prices, and this could knock out several smaller mines.

In its report, Oppenheimer detailed:

Because large oil-producing nations depend on oil revenue for their government budgets, producers exhibit seemingly irrational behavior—producing as much as possible at low prices while investing little in exploration when service costs are at their lowest. Absent a collapse in China, we think the global oil market is re-balancing as US production moves substantially lower. Although we see risk to the downside in oil prices over the next few months, we believe oil will exceed futures pricing in 2016. Extraordinarily high decline rates on some 5.5 Mbd of US shale production could result in lower than expected production, while lower production from reduced global spending should more than offset additional supply from Iran. Meanwhile, global demand continues to increase. Keeping in mind that spare capacity is quite low, we advocate buying select OFS names as long as demand growth remains robust. If demand were to falter, then we would find ourselves in the “lower for longer” camp.

Oppenheimer gave its ratings and price targets for these stocks as follows:

• Halliburton: Outperform with a $48 target.
• Schlumberger: Outperform with a $100 target.
• Weatherford: Outperform with a $14 target.
• Bristow: Outperform with a $50 target.
• Superior: Outperform rating with a $20 target.

ALSO READ: Nomura Sees More M&A in the Oil Patch

Shares of Halliburton were down 0.8% at $35.07 Thursday morning. The stock has a consensus analyst price target of $48.96 and a 52-week trading range of $30.93 to $62.85.

Schlumberger shares were down 0.3%, at $68.79 in a 52-week trading range of $67.75 to $100.54. The consensus analyst price target is $95.34.

Shares of Weatherford were relatively flat at $8.48. The consensus price target is $13.02, and the 52-week trading range is $7.21 to $21.33.

Superior shares were up 1.7%, at $12.85 in its 52-week range of $12.59 to $31.88. The consensus price target is $21.46.

Shares of Bristow were down 2.2% to $25.58. The consensus price target is $51.67. The 52-week range is $25.52 to $75.00.

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