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Don’t Count Out Oilfield Services Stocks

Oilfield services stocks have been on the ropes lately as natural gas supplies hit their highest levels in five years and their lowest prices in a decade. On the face of it, now would appear to be the time to run from the stocks of companies whose equipment and services help oil and gas exploration and production (E&P) companies tap into energy reserves that traditionally have been difficult to reach.

Yet, there are strong indications that the industry may be turning around as the most agile competitors redeploy their assets and refocus their attention on higher-margin business lines and higher-growth regions.

Consider the quarterly earnings reports of the two largest oilfield services companies — Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), both of which reported strong profits last week. Baker Hughes (NYSE:BHI) and Key Energy (NYSE:KEG) will report next Tuesday and Thursday, respectively.

Schlumberger on Friday reported earnings of $1.3 billion (97 cents a share) up from $944 million (71 cents a share) for the same quarter last year, meeting analysts’ expectations. Revenue was $5.6 billion, up from $5.5 billion last year. Although the margins on SLB’s business in North America are narrowing because of the natural gas glut and low prices, strong international earnings growth offset softer performance in the U.S.

Halliburton on Wednesday reported a nearly 23% rise in profit — to $627 million (68 cents a share) for the quarter and a 30% increase in revenue to nearly $6.9 billion. That’s after it took a $191 million charge related to BP’s (NYSE:BP) Macondo well explosion in 2010. The company has begun moving away from dry gas drilling toward oil and liquids. It also is cashing in on Asia-Pacific markets like China and Australia.

Both companies expect continued margin pressure due to the slowdown in North America. Oddly, the natural gas glut is the confluence of several positive events into a short-term negative. Oil services companies have done a great job of helping oil and gas E&P companies make the most of their resources.

So-called hydraulic fracturing (fracking) technology makes it easier to tap into vast shale gas and oil deposits that formerly were too expensive to access. The quest for clean energy — and independence from foreign oil — has raised the profile of natural gas. Add in a balmy winter with lower energy demand, and supplies have soared as prices have plummeted.

But don’t count out oil services stocks just yet. The global oil and gas services and equipment sector still has enough momentum to post a compound annual growth rate of nearly 7% between now and 2017, according to a new report by market research and consulting firm Lucintel. Discovery of new energy sources — as well as strong demand growth in the Asia-Pacific region will drive growth over the next five years.

The researchers acknowledge that the industry faces headwinds, including political instability in oil-producing regions, environmental regulations and new government mandates. Still, Lucintel forecasts increasing demand and stronger pricing for fracking technologies over the next few years — particularly in North America.

Bottom Line: Despite the natural gas glut and other pressures in North America, now is not the time to count out oilfield services stocks. Although this sector will have its fits and starts in the short term, companies with solid fundamentals like HAL and SLB could be a good play for investors with a long time horizon.

Oilfield services companies are adjusting natural gas production and moving rigs and redeploying service capacity from dry gas-rich areas to sites with more oil and natural gas liquids. They’re also seizing new opportunities in deepwater fields, as well as in emerging markets.

I think that HAL and SLB are good long plays now, particularly Halliburton, which is priced at only 11 times earnings. Schlumberger is trading around $72, and Halliburton is trading around $33. My target on SLB is $84, and $44 on HAL.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/04/dont-count-out-oilfield-services-stocks/.

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