Energy
Why Goldman Sachs Is Bullish on Oilfield Services for Q3 Earnings and 2021
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Oil has rallied big off the levels of the spring debacle when the forward futures actually traded negative and panicked traders were forced to sell at a loss as those holding contracts on expiration have to take physical delivery, and with no storage space available, had to take a loss. Trading right around the $40 level now, the analysts at Goldman Sachs think there are numerous upcoming catalysts that can support increasingly higher benchmark prices.
The energy analysts already have raised the firm’s long-term oil price forecasts for 2021, as fundamentals for next year appear skewed to a faster pace than they originally had in their base case for energy pricing. They also have cited the rising likelihood of a COVID-19 vaccine, which would greatly help the travel industry, among others.
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A new report from oilfield services analyst Angie Sedita makes the case that some of the top companies the firm follows could exceed third-quarter expectations. The large drop in stock prices since the summer also is a huge bonus for investors looking to add energy-related names. The report said this about near-term possibilities:
Sector still down 35%-40% from June 2020 highs. We believe the pull-back offers investors an attractive entry opportunity. Quality companies with appealing 12-month catalysts have sold off by 20%-50%. In our view, the long-term positive macro thesis for an oil price recovery in the second half of 2021 (and 2022) remains intact and the sector offers an opportunity for substantial upside into 2021. Additionally, the often seen seasonal trade of the sector rallying into the end of the year (post-election), and early in the year lies ahead.
Six top stocks were considered worth buying now, and all make sense for growth stock investors who feel that adding energy-related shares now is a good long-term bet. While Goldman Sachs rates all six at Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Baker Hughes
This somewhat contrarian play makes sense for investors looking for quality energy exposure. Baker Hughes Co. (NYSE: BKR) is an international industrial service company and one of the world’s largest oil field services companies. It provides the oil and gas industry with products and services for oil drilling, formation evaluation, completion, production and reservoir consulting.
The analysts are bullish on the company’s prospects and wide business silos, noting this in the report:
Energy hybrid (40% of revenues from industrial like businesses) revenues 80% international, LNG exposure with significant competitive moat, focused on energy transition technologies (hydrogen, carbon capture), has the least exposure to energy cyclicality, strong balance sheet (Net debt/EBITDA of 1.3x for 2020), plus a dividend yield of ~5%.
The dividend yield is 5.60%. Goldman Sachs has a $24 price target on the shares, while the Wall Street consensus target is $20.31. Baker Hughes stock closed most recently at $13.15, so hitting the Goldman Sachs target would be almost a 100% gain.
Halliburton
Shares of this industry leader are down almost 75% over the past two years and were recently added to the Goldman Sachs Conviction list. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry. The company 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.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. The company’s business always has been dependent on commodity prices. While the benchmark price of oil has recovered nicely from the lows back in the spring, contrarians that see a path to higher oil prices could make some huge money here. The analysts said this:
Quality beta play on oil price recovery, revenues 60% international, significant structural cost-cutting should lead to greater pricing power in a recovery, investment grade, and the company generating free-cash-flow of $1 billion in 2020 and 2021 (~8.6% FCF yield).
Shareholders receive a 1.44% dividend. Goldman Sachs price target is $22.50, well above the $15.50 consensus target. Halliburton stock closed Wednesday at $12.72.
National Oilwell Varco
This is another top company in the industry and its share price offers an incredible entry point. National Oilwell Varco Inc. (NYSE: NOV) designs, constructs, manufactures and sells systems, components and products for oil and gas drilling and production worldwide.
The company offers various equipment and technologies used to perform drilling operations. It also provides solids control and waste management equipment and services; drilling fluids; portable power generation products; drill and wired pipes; drilling optimization and automation services; tubular inspection, repair and coating services; instrumentation and measuring and monitoring services; downhole and fishing tools; steerable technologies; and drill bits.
24/7 Wall St.Goldman Sachs said this about National Oilwell Varco:
Strong balance sheet (Net debt/EBITDA of 1.3x for 2020), diverse geographic and product mix (onshore/offshore, international/US), with roughly 60% of revenues from the international markets. Offers compelling exposure to both U.S. land and longer term growth in the international and offshore markets.
Investors receive a 1.16% dividend. The $17.50 Goldman Sachs price target compares with the $12.91 consensus figure. National Oilwell Varco stock closed at $8.80 on Wednesday.
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NextTier Oilfield Solutions
This company is less well known to investors but has massive upside to the Goldman target. NextTier Oilfield Solutions Inc. (NYSE: NEX) is third largest provider of U.S. land completion services, including 2.2 million hydraulic horsepower and other services.
This industry-leading U.S. land oilfield service company has a diverse set of well completion and production services across the most active and demanding basins. Its integrated solutions approach delivers efficiency, and its ongoing commitment to innovation helps customers better address what is coming next.
NexTier is differentiated through four points of distinction, including safety performance, efficiency, partnership and innovation, and it may be one of the most compelling energy stocks today. The analysts remain very positive:
Leading U.S. land pressure pumping company, top-tier in operational execution, attractive balance sheet (2021 Net debt/EBITDA 0.7x), recent merger with C&J to provide revenue synergies over time, and least expensive of the peer group at a 35% discount to the peer group.
Goldman Sachs has set a $5 price target. The consensus target is $3.75 and shares closed at $2.02. Trading to the analyst’s target would be an incredible 170% gain.
Schlumberger
This top oil services company is expected to benefit from increased global exploration and production spending in 2021 and beyond. 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.
The analysts are enamored with this industry leader at such a low price:
Global market share leader, greater international exposure (~80% of 2021 revenues), quickly evolving asset-light strategy, leader in digital initiatives and technology, strong free-cash-flow yield of 10% for 2021, plus new CEO driving rapid change and well-received by investors.
Shareholders receive a 3.18% dividend. The Goldman Sachs price objective is a stunning $30. The consensus target price is $23.46, and Schlumberger stock closed at $15.95.
24/7 Wall St.TechnipFMC
This is an incredible energy play for investors that may be a touch more conservative. TechnipFMC PLC (NYSE: FTI) engages in the oil and gas projects, technologies and systems and services businesses. It operates through three segments.
The Subsea segment manufactures and designs products and systems; performs engineering, procurement and project management; and provides services used by oil and gas companies involved in deepwater exploration and production of crude oil and natural gas.
The Onshore/Offshore segment designs and builds onshore facilities related to the production, treatment and transportation of oil and gas, and it designs, manufactures and installs fixed and floating platforms for the production and processing of oil and gas reserves.
The Surface Technologies segment designs and manufactures systems, as well as provides services used by oil and gas companies involved in the land and shallow water exploration and production of crude oil and natural gas. This segment also designs, manufactures and supplies technologically advanced high-pressure valves and fittings for oilfield service companies, and it provides flowback and well-testing services for exploration and production companies.
The dividend yield is 1.91%. Goldman Sachs has a $12.50 price objective. The consensus target is $11.39. TechnipFMC stock ended Wednesday at $6.90, so sitting that Goldman Sachs target would be almost a 100% gain.
This cornucopia of oilfield services stocks may be contrarian plays that are still very out of favor, but with two industry leaders and four additional deep value plays, there is something for every risk appetite. Those looking to buy in front of earnings may want to add partial positions and see how the reports come in.
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