Energy

Why Battered Oilfield Services Stocks Could Be Big 2020 Winners

Lee Jackson

Published: January 3, 2020 7:15 am

Last Updated: January 30, 2020 11:37 am

If any sector sputtered in 2019 it was energy, and the oilfield services stocks joined in for the disappointment. But what a difference a year can make. With both West Texas Intermediate and Brent crude trading over the $60 a barrel mark to start 2020, and a host of potential positives in the queue for the next 12 to 18 months, there could be some big money to be made in the top stocks in the services group.

In a new research report, Stifel feels there are indeed a host of positives in 2020 that could lead to strong 2021 earnings growth, and while some would be inclined to wait, it’s important to remember that the pros on Wall Street anticipate future developments and buy in advance.

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In the report, the Stifel team listed six specific factors that could help the oilfield services arena. All are very positive forward metrics for the battered sector.

1. The reflation trade that favors cyclicals, as highlighted by Stifel’s U.S. Equity Strategist Barry Bannister.
2. An end to the downward estimate revision cycle for oil service stocks.
3. Weakening U.S. oil production growth.
4. Pressure pumping fleet attrition.
5. Continued underinvestment by oil service players.
6. Positive free cash flow generation.

Stifel is especially bullish on four top companies, two of which reside on the firm’s Select List of top stock picks. All four are rated Buy at the firm.

Baker Hughes

The analysts at Stifel made a big move by adding Baker Hughes Co. (NYSE: BKR) to the firm’s well-respected Select List of stocks to Buy. This is big as energy and oilfield services stocks have suffered last year while the major indexes have delivered 20% returns.

Baker Hughes is an international industrial service company and one of the world’s largest oilfield services companies. It provides the oil and gas industry with products and services for oil drilling, formation evaluation, completion, production and reservoir consulting.

General Electric recently gave up majority control of the company, selling shares that raised about $3 billion cash but triggered a more than $7 billion accounting charge. Stifel noted these positives in its report:

Strong free cash flow expected; rising international oilfield activity should drive margin improvement in Oilfield Services segment, robust LNG order flow creates solid visibility for Turbomachinery & Process Solutions business; GE ownership falling; and balance sheet remains strong.

Baker Hughes shareholders receive a solid 2.81% dividend. The Stifel price target for the shares is $31, while the Wall Street consensus target is $29.04. The stock closed most recently at $25.61 per share.

DMC Global

This off-the-radar company offers big upside to the Stifel price target. DMC Global Inc. (NASDAQ: BOOM) engages in the provision of technical products and services in the energy, industrial and infrastructure markets. It operates through the following segments.

The NobelClad segment produces explosion-welded clad metal plates for the construction of corrosion-resistant industrial processing equipment and specialized transition joints. The DynaEnergetics segment designs, manufactures and distributes products used by the global oil and gas industry, principally for the perforation of oil and gas wells.

The analysts pointed out some important items in the Stifel report:

Leading integrated perforating gun system; overall market rapidly adopting integrated perforating solutions over components; Free-cash-flow likely turns positive in 2020-21 following facility investments in 2018-19; and possibility of an acquisition exists although we believe management will remain very disciplined adding a business line.

Investors in DMC Global receive a 1.11% dividend. The bullish $59 Stifel price objective compares to an even higher Wall Street consensus target price of $64.50. The last trade on Thursday was recorded at $44.93.

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This is another company that is less well known to investors but has massive upside to the Stifel target. NextTier Oilfield Solutions Inc. (NYSE: NEX) is an industry-leading U.S. land oilfield service company with a diverse set of well completion and production services across the most active and demanding basins. The company’s integrated solutions approach delivers efficiency, and the firm’s ongoing commitment to innovation helps its customers better address what is coming next.

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NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation. The Stifel analysts are very positive on the outlook and said this in the report:

Leading pressure pumper; synergies from recent merger likely a positive in 2020; recent agreement in the Middle East could provide growth opportunity; industry underinvestment and fleet attrition a potential plus for 2021; and compelling valuation with projected 2020-21 free-cash-flow yields over 15%.

Stifel has a huge $11 price target, which is above the consensus target of $9.01. The shares were last seen trading at $6.51 apiece.

Schlumberger

This top oil services company is expected to benefit from increased global exploration and production spending, and it is also on the Stifel Select List. Schlumberger Ltd. (NYSE: SLB) is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells.

The company operates in the oilfield service markets through three groups: Reservoir Characterization, Drilling and Production. 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.

Rising activity, backlog additions for integrated projects and the possibility that international pricing has bottomed and should improve the rest of 2019 should be supportive of improving earnings over the next few years, and the analysts noted this:

Leveraged to improving international activity; strong free-cash-flow expected; potential asset sales should bolster balance sheet; limiting SPM investment and disciplined capital spending plans; and dividend appears safe.

Schlumberger offers shareholders a massive 4.98% dividend. Stifel has set a $47 target price for the shares. The posted consensus target is lower at $42.66, and the stock ended trading at $40.17 on Thursday.

With a huge 2019 in the books, it makes sense to rotate at least some portfolio allocations toward energy. Given the slowdown in U.S. production, the continued cuts from OPEC and the always worrisome geopolitical issues in the Middle East, a $60-plus handle on crude throughout 2020 looks quite possible. That bodes well for some of the beleaguered stocks in the oilfield services sector.