It still seems hard to believe that just a little over two years ago oil prices were bubbling near the $100 a barrel level and everything was a go in every major drilling area in the United States. Then came the sell-off, and the rig count plummeted domestically from 1,859 in November of 2014 to just 442 today. While that is better than the low count of 374 in late May, it is a long way from the heights in 2014. One thing is for sure, the consolidation of the last two years got rid of a lot of the weak hands.

In a new UBS research report, oil services analyst Angie Sedita makes the case that earnings are starting to surprise to the upside somewhat, and while deepwater offshore could be slow well in 2018, the land drillers and operations look better. The UBS team has three of the big players rated Buy, and they are the ones to stick with as the recovery goes on.

Baker Hughes

While the deal with Haliburton fell apart, the company has continued to trade higher since and looks very attractive now. Baker Hughes Inc. (NYSE: BHI) is engaged in the oilfield services industry and is a supplier of oilfield services, products, technology and systems used in the oil and natural gas industry around the world. It also provides industrial products and services for other businesses, including downstream chemicals and process and pipeline services. It conducts its operations through its subsidiaries, affiliates, ventures and alliances.

Baker Hughes has four geographic operating segments: North America, Latin America, Europe/Africa/Russia Caspian and Middle East/Asia Pacific. It also has an Industrial Services segment, which includes the downstream chemicals and the process and pipeline services businesses. The company’s oilfield products and services are of approximately two categories, Drilling and Evaluation or Completion and Production.

The UBS analysts cite solid cost-cutting efforts, and the analysts noted in a recent research report:

The strategy came across far more clearly this conference call outlining that the new international model would impact less than 5% of revenue, which should be offset by greater gains in margins with the de-emphasis of lower return product lines. Baker Hughes seeks growth opportunities from new international sales channels, 60 pending new technologies, and new business lines including subsea.

Baker Hughes shareholders receive a 1.42% dividend. The UBS price target is $55, and the Wall Street consensus target is $51.63. The stock closed most recently at $47.85.

Halliburton

This company also has ticked higher since the deal with Baker Hughes fell through due to regulators’ concerns, but is still done almost 40% from highs printed two years ago. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry. The company serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
Halliburton operates through two segments. The Completion and Production segment delivers cementing, stimulation, intervention, pressure control, specialty chemicals, artificial lift and completion products and services. The Drilling and Evaluation segment provides field and reservoir modeling, drilling, evaluation and wellbore placement solutions that enable customers to model, measure, drill and manage its well construction activities. The company’s baroid provides drilling fluid systems, performance additives, completion fluids, solids control, specialized testing equipment and waste management services for oil and natural gas drilling, completion and workover operations.

UBS noted in a recent report that despite the recent pullback in oil pricing the U.S. exploration and production companies remain quite optimistic on returning to the field when oil can hit and hold $50 a barrel. The firm also felt it was equally interesting that it was Halliburton’s view that a 2,000 rig count of the last cycle equates to 900 rigs this cycle, or about double the current count.

Halliburton investors are paid a 1.63% dividend. The $55 UBS price target for the stock is well above the consensus price target of $46.03. The shares closed Tuesday at $44.05.

Schlumberger

This top oil services company came in with second-quarter results that beat expectations. Schlumberger Ltd. (NYSE: SLB) is a supplier of technology, integrated project management and information solutions to the international oil and gas exploration and production industry. The company remains the largest oilfield services company in the world for now, with far-reaching operations all around the globe, and could be poised for years of solid growth despite the huge turn down in oil pricing.

Schlumberger operates in the oilfield service markets through three groups. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. These include WesternGeco, Wireline, Testing Services and Schlumberger Information Solutions. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells and consist of Bits & Drilling Tools, M-I SWACO, Drilling & Measurements, Land Rigs and Integrated Drilling Services. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Water Services, Integrated Production Services and Schlumberger Production Management.

UBS likes the impressive execution by company management and said this in a recent research report:

We applaud Schlumberger’s efforts to lead the charge on recovering steep price concessions and restructuring unprofitable contracts as the oil service industry has taken the brunt of the oil price downturn pain. Now that oil is up 40% off the bottom, price recovery becomes a top focus.

Shareholders are paid a solid 2.45% dividend. UBS has a $100 price objective, while the consensus target is lower at $92.56. The stock ended the day on Tuesday at $81.83.

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While things have clearly improved, oil spot prices remain volatile, as we saw a 20% or so dip in just over a month. Staying with the industry leaders remains a good plan for the foreseeable future, and they certainly should outperform when things get better.

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