JPMorgan Says Stay With Oilfield Services Leaders for the Rest of 2017
With oil trying to push back through the psychological $50 a barrel level, it’s becoming increasingly apparent that many of the exploration and production (E&P) companies learned their lesson during the huge sell-off in 2015 and are quick to slow down when the price starts to stagnate. While a collapse of oil back into the $20s seems unlikely, it’s a good bet that the black gold could stay range bound between $45 and $55 for some time.
A new research report from the oilfield services and equipment team at JPMorgan makes the case that while Wall Street applauds the new discipline being shown by E&P and services companies, the analysts do note that energy remains in what they call a “bad news is bad news” environment, and they stick with the large cap oilfield services leaders and some select smaller companies. We found five that make sense to own for the rest of 2017.
Halliburton
This stock is still down almost 25% from highs printed in January, and it remains the top large cap pick at JPMorgan. 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.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. For investors looking for an oilfield services company to add, this is arguably the best, and analysts feel it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows.
The company posted solid second-quarter results, which the JPMorgan team anticipated, and they noted this in the report:
Though we were encouraged by Halliburton’s restraint regarding frac newbuild equipment and believe the recent reset somewhat de-risks smid-cap frac prints, the company’s full third quarter frac schedule suggests runway for others.
Halliburton shareholders are paid a 1.7% dividend. The JPMorgan price target for the stock is $60, and the Wall Street consensus target is $57.50. The shares traded early Wednesday at $42.90.
Schlumberger
This top oil services company is a solid large cap pick for more conservative accounts. 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 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.
Schlumberger is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells. Revenues in 2016 totaled $27.8 billion, and the company posted EBITDA of a massive $6.5 billion.
Schlumberger also posted very solid second-quarter results, exceeding consensus expectations for both revenue and earnings by a notable margin. Despite the slowdown of the recovery in commodity prices in the second quarter, the company managed to grow its top and bottom lines, driven by rising drilling demand in the North American onshore markets, as well as seasonal improvements in the international markets.
Shareholders are paid a solid 3% dividend. JPMorgan has a $79 price objective on the stock, in line with the consensus estimate of $79.23 a share. The stock traded Tuesday morning at $67.10.
Technip FMC
This is the other large cap company that the analysts remain positive on. Technip FMC PLC (NYSE: FTI) is a U.K. company and a global leader in subsea equipment and onshore and offshore engineering and construction projects. It also has activities on the surface, including drilling and well services.
The analysts noted in the report that the company restated first-quarter results due to noncash currency valuations on certain projects. While adding the potential for volatility to the stock, they also feel that it could create a solid buying opportunity into the second-quarter results, which are Wednesday after the close.
The whopping $44 JPMorgan price target compares to the posted consensus figure of $35.91. The shares were changing hands early Tuesday at $27.80.
Core Laboratories
This top mid-cap pick has traded sideways for the better part of this year. Core Laboratories N.V. (NYSE: CLB) provides reservoir description, production enhancement and reservoir management services to the oil and gas industry in the United States, Canada and internationally. It operates through three segments: Reservoir Description, Production Enhancement and Reservoir Management.
The company reported second-quarter revenue of $164 million, which was up 10.7% year over year but below the analyst consensus forecast. It was slightly lower than previous guidance because of industry shortages of completion crews and equipment caused fewer than expected completions, but an improvement in revenue mix generated higher operating margins.
The $123 JPMorgan price target compares with the consensus target of $121. The shares traded Wednesday morning at $99.15.
Nabors Industries
This company provides drilling and rig services and is another top 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 3.15% dividend. JPMorgan has set its price target at $15. The consensus price objective is at $13.11, and shares were last seen at $7.90.
Clearly this a value play for investors, especially buying shares in front of what is expected to be declining or stagnant earnings. The top companies have fought through oil price swings before, and they should work their way through the current range and come out in good shape.
