Energy
$60 to $70 Oil Could Mean Huge Upside for Top Oilfield Services Stocks
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While many think that the top analysts on Wall Street are the oracles of all prognostications when it concerns stocks and the potential for any specific sector going forward, one of the best ways for the top Wall Street firms to get a gauge on what the future may hold is to ask their customers. Typically the top institutional accounts have their own research analysts who are charged with covering the firm’s positions and prospects, instead of publishing for retail and institutional consumption.
In a new research report, the global oilfield services team at RBC did just that, and surveyed a whopping 500 U.S. and Canadian institutional investors asking a variety of questions to get an idea how they feel about valuations in the current environment. The survey found that investors are looking for anywhere from 10% to 40% upside for oilfield services stocks, depending on the price of oil, with the lower level discounting $60 a barrel and the higher level $70 per barrel.
While nobody knows exactly what this year will bring, prices appear solidly over the $50 level for Brent and West Texas Intermediate, so a push to the $60 level is not out of the question in 2017. We screened the RBC research universe and found four top stocks rated Outperform.
Baker Hughes
This company announced a gigantic merger with General Electric back in the fall. Baker Hughes Inc. (NYSE: BHI) supplies oilfield services, products, technology and systems to the oil and natural gas industry worldwide. It offers drilling and evaluation products and services, which include drill bits for performance drilling, hole enlargement, and coring; conventional and rotary steerable systems used to drill wells; measurement-while-drilling and logging-while-drilling systems to perform reservoir navigation services; drilling optimization services; tools for coil tubing drilling and wellbore re-entry systems; coring drilling systems; surface logging; emulsion and water-based drilling fluids systems; reservoir drill-in fluids; and fluids environmental services.
The company’s drilling and evaluation products and services also comprise wire line services, such as tools for open hole and cased hole well logging to gather data to perform petrophysical and geophysical analysis; reservoir evaluation coring; casing perforation; fluid characterization; production logging; well integrity testing; pipe recovery; and seismic and microseismic services.
GE is creating a $32 billion oil business by combining its petroleum-related operations with Baker Hughes, betting on a rebound for an industry mired by a historic slump in crude prices. The new company will be one of the industry’s largest players, bringing together a portfolio of capabilities spanning oilfield services, equipment manufacturing and technology. GE will own 62.5% of the merged entity, which will be publicly traded, the companies have said. The deal is expected to close in the middle of this year.
Shareholders receive a 1.07% dividend. The RBC price target for the stock is a whopping $80, and the Wall Street consensus target is $68.31. The stock closed Monday at $63.24.
Halliburton
This one of the four top large cap diversified companies to buy at RBC, and the stock is still down almost 25% 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. 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.
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 1.28% dividend. The RBC price target is $65. The consensus is at $59.44. The shares closed Monday at $56.07.
Schlumberger
This top oil services company came in with third quarter results that beat expectations, and is the other top large cap pick for 2017. 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, 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 2.32% dividend. The RBC price objective is $103. The consensus target is $94.94, and the stock ended Monday at $85.77.
Weatherford
This company has been absolutely demolished, but it may be offering aggressive investors big upside potential. Weatherford International Ltd. (NYSE: WFT) is one of the largest multinational oilfield service companies, providing innovative solutions, technology and services to the oil and gas industry. It operates in over 100 countries and has a network of approximately 1,200 locations, including manufacturing, service, research and development, and training facilities and employs approximately 37,000 people.
The company offers customers 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 in 2014 may provide some favorable tailwinds for the company, despite the huge downturn in oil pricing.
The $8 RBC price target compares with the consensus target of $7.42. The stock closed Monday at $5.88.
With the price of oil firming above $50 and the expectation of prices close to $60 or higher this time next year, these companies could be poised for significant increases in business over the next 12 to 18 months. The stock prices could follow as well.
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