As the unconventional drilling and fracking revolution has spread across North America, all the firms providing the drill bits, fracking pumps and other essential rig equipment have been riding high. After all, these companies are doing the heavy lifting.
Broad exchange-traded fund measures of the oil and gas services sector — like the Market Vectors Oil Services ETF (NYSE:OIH) — have soared 30% or more the past three months and continue to mint new 52-week highs. However, venerable investment bank Goldman Sachs (NYSE:GS) thinks this is just the beginning for the sector’s returns.
According to the firm’s latest research report, the previous four quarters of sequential declines in North American drilling activity and oil service profitability has finally broken, and the new year has signaled a turnaround in activity. Revenues and profit margins for many North American service companies bottomed in Q4 2012, marking a major inflection point.
Goldman believes service providers’ stocks should get a boost from increased free cash flow, and the potential for dividend increases and share buybacks. Likewise, expansion of margins, asset restructuring, rising horizontal rig counts and the possibility of leveraged buyouts will drive the sector upwards over the next few years.
Given these factors, the investment bank has some pretty specific targets in mind for its “conviction” buy list. Here is a look at some of Goldman’s top picks for the sector: