[cnxvideo id=”509257″ placement=”ros”]What a wild ride 2016 has been for the energy industry. We started the year in a downward spiral, with oil prices bottoming in the mid $20s in February, and fought our way all the way back to the current low $50s range following the first OPEC production cut in years. While analysts always factor in a modicum of cheating by the OPEC and non-OPEC nations, the sheer psychology of the cut is good for the overall markets and sector.
A new JPMorgan research report makes the case that the OPEC cut essentially has pushed oil prices to where exploration and production companies were banking on for 2017. They note this in the report:
We expect some cyclical service pricing gains next year, but those don’t preclude the secular deflation from exerting further pressure on the supply chain. Our mid-cycle expectations remain intact and we believe much of the group will struggle to generate positive earnings barring oil north of $60, a headwind for the stocks into 2018.
With that somewhat cautionary tone, and noting that for the first time since 2010 the PHLX Oil Service Sector index (OSX) is poised to outperform the broader market, JPMorgan tends to stick with the biggest players in the industry, which looks like a very solid plan. Six stocks were top picks, and we cover four in depth in this report, starting with giants Halliburton Co. (NYSE: HAL) and Schlumberger Ltd. (NYSE: SLB). That is followed by a look at two of the top small/mid-cap picks from JPMorgan.
Tetra Technologies Inc. (NYSE: TTI) and MRC Global Inc. (NYSE: MRC) also are listed as top picks at JPMorgan. Both are smaller cap companies with outstanding prospects that may be better suited for aggressive growth portfolios.
Halliburton
This company is the top pick for 2017 at JPMorgan, and it is still down almost 30% from highs printed two years ago. Halliburton is one of the world’s largest providers of products and services to the energy industry. It 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.
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The oil field giant announced last year a $1 billion investment to develop huge potential oil fields in Ecuador and has entered into a long-time deal with Petroamazonas, an Ecuador-based company involved in the exploration and development of the country’s oil reserves. With oil looking to stabilize in the $40 to $50 range, this top oil service company is a great stock to buy on sale, as the oil recovery has shown some legs.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. Revenues in 2015 totaled $27.8 billion and EBITDA was $7.2 billion. For investors looking for an oil field services company to add, this is arguably the best.
Halliburton shareholders receive a 1.34% dividend. The JPMorgan price target for the stock is $63. The Wall Street consensus target is $55.81. The shares closed Wednesday at $53.54.
Schlumberger
Third-quarter earnings results from this top oil services company beat expectations, but revenues fell short. The company is the other top large cap pick for 2017. Schlumberger 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, with far-reaching operations all around the globe, and it could be poised for years of solid growth despite the huge turn down in oil pricing. It 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.
Shareholders receive a 2.37% dividend. JPMorgan has a $100 price objective. The consensus target is $93.41, and the stock ended Wednesday at $84.35.
Core Laboratories
This company is a top mid-cap pick that had a nice post-election bounce, though it is still trading below highs printed last spring. Core Laboratories N.V. (NYSE: CLB) provides reservoir description, production enhancement and reservoir management services to the oil and gas industry in the United States, Canada and internationally.
The company operates through three segments. The Reservoir Description segment comprises the characterization of petroleum reservoir rock, fluid and gas samples. This segment offers analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry.
The Production Enhancement segment includes services and products relating to reservoir well completions, perforations, stimulations and production. It offers integrated services to evaluate the effectiveness of well completions and to develop solutions to enhance the effectiveness of enhanced oil recovery projects.
The Reservoir Management segment combines and integrates information from reservoir description, as well as provides production enhancement services to increase the production and improve recovery of oil and gas from its client’s reservoirs.
Shareholders receive a 1.91% dividend. The $138 JPMorgan price target compares with the consensus target of $120.12. The shares closed at $115.23.
Nabors Industries
This company provides drilling and rig services. Nabors Industries Ltd. (NYSE: NBR) offers rig instrumentation, optimization software and directional drilling services. It also provides completion, life-of-well maintenance and plugging and abandonment of a well.
In addition, the company markets approximately 466 land drilling rigs for oil and gas land-based drilling operations in the United States, Canada and approximately 20 other countries worldwide; approximately 445 rigs for land well-servicing and workover services in the United States; 98 rigs for land well-servicing and workover services in Canada; 42 rigs for offshore drilling operations in the United States and internationally; and seven jackup units and components of trucks and fluid hauling vehicles.
Top Wall Street analysts have stated that they think concerns over the company’s balance sheet are way overblown, and at current levels the shares are pricing in too modest of an industry recovery. In addition, the international exposure the company has helps to provide more stability.
Investors receive a 1.44% dividend. The JPMorgan price target is $22. The consensus price objective is $15.44, but shares closed on Wednesday at $16.65.
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The JPMorgan plan of staying with the bigger, more liquid, sector leaders makes sense. While there is still solid upside potential, much of the gains in the stocks from the early 2016 lows are baked in. These should fare better in the event of a market pullback.
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