In the first half of 2017 only one sector in the S&P 500 was down and that was energy. When the price of West Texas Intermediate crude plunged toward the low $40s from the $55 a barrel high printed in April, the bears got noisy. Despite the growls, oil has rebounded, and those who hopped in the sector in late June have done well. The question for most investors is simple: Is this the top of the range, or can we break out? The answer is not so simple.
A new research report from the oilfields services team at RBC says that going forward we could see a 100 oil rig swing up or down, but if the count does decline, the rigs that get weeded out will be of the less efficient nature. That said, the analysts feel that the super-spec rigs will remain in high demand, fully utilized, and day rates will go higher.
It is important to note that two of the RBC picks are frac sand stocks that have been absolutely mauled, and they may continue to, as one reported poor second-quarter results. We screened the RBC oilfield stock universe and found four stocks rated Outperform with massive upside potential. While not suitable for all accounts, for those with higher risk tolerance these stocks could be huge winners for patient investors with a long horizon.
Nabors Industries
This company provides drilling and rig services and is a top small to mid cap pick. 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 3.12% dividend. The RBC price target for the shares is $14. The Wall Street consensus price objective is $13.11, and shares closed Monday at $7.71.
[nativounit]
Independence Contract Drilling
This smaller cap company has big upside potential and has been rumored as a buyout candidate. Independence Contract Drilling Inc. (NYSE: ICD) provides land-based contract drilling services for oil and natural gas producers in the United States. The company constructs, owns and operates a fleet of shale drilling rigs to optimize the development of various oil and gas properties in the Permian Basin. As of December 31, 2016, it had 12 rigs.
While the company reported a second-quarter loss, the utilization of the company’s fleet of drilling rigs increased. Chief Executive Officer Byron Dunn noted this when results were released:
We currently have our entire fleet contracted, with our 14th rig scheduled to spud its first well by the end of the month under a multi-year contract. We believe the U.S. fleet of pad-optimal rigs has reached full effective utilization, and dayrates have improved to the high teens – low $20,000 per day range. We continue to have success recontracting rigs on term contracts at improving rates.
RBC has a stunning $7 price objective, but the consensus target price is higher at $7.38. The shares closed Monday at $3.87.
[recirclink id=404431]
Fairmount Santrol
This is another smaller cap company that offers solid upside potential for more aggressive investors. 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 also supplies proppants to oilfield service companies.
RBC has set its price target at a huge $6, but the posted consensus target is even higher at $7.25. The shares closed Monday at $2.92 but traded lower early Tuesday on a competitor’s earnings miss.
[recirclink id=405145]
U.S. Silica Holdings
This is another company that has been absolutely smoked recently and has awesome upside potential. U.S. Silica Holdings Inc. (NYSE: SLCA) is a leading producer of commercial silica used in the oil and gas industry, as well as in a wide range of industrial applications. Over its 115-year history, U.S. Silica has developed core competencies in mining, processing, logistics and materials science that enable it to produce and cost-effectively deliver more than 260 products to the firm’s customers across all end markets.
The company currently operates nine industrial sand production plants and eight oil and gas sand production plants. With the price of oil stabilizing, many of the short-sellers that targeted the frac sand companies may be starting to cover their positions.
The company reported second-quarter results that missed estimates and lowered forward estimates. However, many of the metrics in the report were positive, and the lowered estimates are in part due to higher capital expenditure guidance for 2017. While it is knocking the sand group down, it may be providing investors an even better entry point as oil looks poised to move back over $50.
U.S. Silica shareholders are paid a 0.9% distribution. The RBC price target is $55. The consensus target is $52.14, and the stock closed Monday at $29.13.
[wallst_email_signup]
While it is entirely possible that oil stays range bound, breaking the $50 level for West Texas Intermediate could be a psychological lift for the stocks and investor confidence. Plus, any major disruption in oil production from a global macro event and we could see a spike in pricing, and that could boost shares as well.
Top Gaining Stocks
Top Losing Stocks