Energy

RBC Has 4 Top Oil Services Stocks to Buy as Sector Rally Matures

Lee Jackson

Published: February 14, 2017 8:35 am

Last Updated: January 12, 2020 2:51 pm

If you were buying oil services this time last year, you had either years of experience in the sector, were a deep value investor with a very long time line, or you plain and simple had nerves of steel. With oil up right at 100% from the lows that were put in a year ago, the risk factor has sharply diminished, but so have the chances for huge gains. Now it’s a question of stock picking, and that’s where the best research comes in handy.

In a new research report, RBC likens the current stage of the rally in oil services to the third leg of a 4×100 relay race, and the analogy is good. The first leg was by those experienced sector investors and value players, the second leg was what the RBC team calls the chart momentum players. They expect them to hand the baton in the third leg in the coming quarter to the earnings momentum investors.

The analysts feel that land drillers, frac servicing and frac sand companies will hit the momentum players screens, and they have four rated Outperform for investors to consider now.

Nabors Industries

This company provides drilling and rig services and is on RBC’s Global Best Ideas list. 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.

Nabors investors are paid a 1.5% dividend. The RBC price target for the stock is $20. The Wall Street consensus price objective is $19.46. The stock closed Monday at $15.97 per share.

Patterson-UTI Energy

This company could see meaningful business coming from Canada this year. Patterson-UTI Energy Inc. (NASDAQ: PTEN) subsidiaries provide onshore contract drilling and pressure pumping services to exploration and production companies in North America. Patterson-UTI Drilling Company and its subsidiaries operate land-based drilling rigs in oil and natural gas producing regions of the continental United States and western Canada. Universal Pressure Pumping and Universal Well Services provide pressure pumping services primarily in Texas and the Appalachian region.

The stock has been on a solid roll since late November, and the outperformance could be attributed to good execution and reduction in the cost structure. Other Wall Street analysts have noted that the company’s pressure pumping margins improved substantially.

Patterson-UTI investors are paid a 0.4% dividend. The $35 RBC price target is well above the consensus target of $27.87. Note that the stock closed Monday at $28.62.

Halliburton

This is the top pick for 2017 for some on Wall Street, and it is still down almost 25% from highs printed in the summer of 2014. 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, and RBC feels it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows.

Halliburton shareholders are paid a 1.28% dividend. RBC has a price target of $65, and the consensus target is posted at $63.52. The shares closed most recently at $56.32.

Fairmount Santrol

This smaller cap company has solid upside potential for more aggressive investors and it is also on the RBC Global Best Ideas list. Fairmount Santrol Holdings Inc. (NYSE: FMSA) provides sand-based proppant solutions for exploration and production companies to enhance the productivity of their oil and gas wells. The company operates in two segments.

The Proppant Solutions segment primarily provides sand-based proppants for use in hydraulic fracturing operations in the United States, Canada, Argentina, Mexico, China, Northern Europe and the United Arab Emirates. The company’s products include northern white frac sand, API-spec brown sand and resin coated proppants, as well as ceramic proppants, PowerProp product and Propel SSP product that utilizes a polymer coating applied to a proppant substrate.

The Industrial & Recreational Products segment offers raw, coated and custom blended sands for use in building products, glass, turf and landscape, and filtration industries, as well as for foundries primarily in North America. Fairmount Santrol Holdings also supplies proppants to oilfield service companies.

The RBC team sees frac sand demand exploding, with volumes up 70% this year and the price up 20% or more.

RBC has set its price target at $16, while the consensus target is much lower at $12.88. Shares closed most recently at $12.01.

While the group has rallied sharply, there is still upside potential for investors. It may make sense to buy small positions here and see how the market shakes out after having printed multiple all-time highs.