5 Oil Services Buys Beyond the ‘Big Two’

While exploration & production firms get all the public glory for the gushers of oil and natural gas being produced in the U.S., InvestorPlace readers should know that oil services stocks are the ones doing the heavy lifting and drilling.

Most of that drilling, equipment and other well-side tasks are done by oil services heavyweights Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB). After all, these two are widely considered as the sector’s “best of breed,” have huge cost advantages, and boast plenty of long-term contracts with E&P companies. That’s why the pair often are featured prominently in energy-focused mutual funds or ETFs.

However, there’s more than one way to frack a well — which is especially good news on the heels of Halliburton’s third-quarter earnings failing to wow Wall Street.

With overall U.S. onshore rig counts dropping by 9% this year — the most sustained decline since the recession in 2009 — many of the two heavyweights’ competitors have fallen hard thanks to their smaller sizes or narrower focuses, and their shares can be currently had for relative peanuts. And with America’s natural gas dominance almost assured, investors have the opportunity to pick up some long-term oil services bargains on the cheap.

Here are five beaten-down sector picks outside HAL and SLB:

Oil States International

Oil States International (NYSE:OIS)Trailing P/E: 9.9
2013 P/E: 9.5

Let’s say you’re an energy producer fracking a remote well in North Dakota’s Bakken shale or Canada’s Duvernay shale and have roughly 200 employees on the job site. It’s too far removed from civilization to travel to and from each day. What do you do?

You place a call to Oil States International (NYSE:OIS) and have it build a modular housing facility for your operation.

While Oil States operates across four business segments — including offshore products, well site and tubular services — its accommodations unit is by far the star of the show. OIS’s camps are designed to be modular, mobile and scalable, and they can create housing facilities to accommodate as little as 20 or as many as 5,000 workers.

More important, the company operates these facilities across the energy sector’s main hotbeds of activity: Australia, Canada and the U.S. Rising energy production in these area, for example new oil sands projects, will require an additional 35,000 to 40,000 workers by 2015 and will boost the firm’s bottom line.

C&J Energy Services

C&J Energy Services (NYSE:CJES)Trailing P/E: 5.3
2013 P/E: 6.3

Aside from the various ingredients in the fracking fluid that’s used to crack open a shale well, it also takes some very high-pressure and high-horsepower pumps. C&J Energy Services (NYSE:CJES) is as close as you can get to a pure player in sector. The company strictly provides hydraulic fracturing, coiled tubing and pressure-pumping services to E&P industry.

Between 2009 and 2011 that was a great place to be. However, as the glut of natural gas continues, rig counts across the nation continue to drop, hurting firms like C&J that provide the pressure.

However, looking longer-term, fracking will remain an integral part of North America’s energy future, and players like C&J will be there to provide those essential services.

For investors, the dip in rig counts has created an opportunity to snag a premier pure player that boasts a three-year EPS growth rate of 781% — at a discount. In addition to its other attractive multiples, CJES currently is trading at a delicious price-to-earnings growth ratio of just 0.27, meaning it’s very undervalued (fair value = 1).

Helmerich & Payne

Helmerich & Payne (NYSE:HP)Trailing P/E: 10.3
2013 P/E: 11.2

The contract drilling business accounts for almost all of Helmerich & Payne’s (NYSE:HP) operating revenues. But of course, lower rig counts also have hurt this firm. However, like C&J, the longer-term is rosy for HP.

Its cost advantage in building new rigs will allow it to increase market share in the coming years. Analysts expect 2013 E&P capital spending budgets will be up about 10% to 20% year-over-year and will focus more on U.S. and Canadian mixed shale fields.

At the same time, the recent strength in natural gas and shale oil pricing should boost E&P firm cash flows and provide strong incentives for increased drilling in the new year. Roughly 80% of HP’s customer base comprises major oil companies and large-cap independent E&Ps.

Shares of Helmerich & Payne currently trade at a better valuation than several competitors, including Union Drilling (NASDAQ:UDRL) and Pioneer Energy Services (NYSE:PES).

Key Energy Services

Key Energy Services (NYSE:KEG)Trailing P/E: 9.4
2013 P/E: 10.6

After reporting terrible third-quarter earnings, shares of Key Energy Services (NYSE:KEG) plunged more than 12% and continued to drift downwards to rest at the low end of its 52-week range. As the largest onshore, rig-based well-servicing contractor based on the number of rigs owned, it’s no surprise that Key Energy reported terrible numbers.

Yet, while market conditions in the oilfield services sector have weakened in 2012, Key Energy does have some tricks up its sleeve.

First, the continued rapid growth in shale-oil wells will directly benefit Key Energy’s core workover rig division. That’s used primarily to recondition and/or recomplete wells. Second, the firm specializes in maintaining production levels from declining wells. Fracking a well produces a high volume of gas very quickly, which results in quick declines.

All in all, both capabilities will support Key Energy in the future.

Newpark Resources

Newpark Resources (NYSE:NR)Trailing P/E: 9.5
2013 P/E: 9.1

Small-cap Newpark Resources (NYSE:NR) is an interesting hodgepodge of various oilfield services that work well together. The company operates in three main segments: Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services.

While the mats and environmental divisions provide stable cash flows, its drilling fluids division is where the real action is.

This business segment provides products and services for technically difficult drilling projects, i.e. horizontal, directional and deepwater drilling. Proper drilling mud and fluids can mean the difference between profiting from a well or not. As one of the standard providers of fluids, Newpark can be found in most areas of U.S. drilling activity, including onshore Texas and Louisiana, the Mid-Continent and in the many burgeoning unconventional shale plays of North America.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2012/10/5-oil-services-buys-beyond-the-big-two/.

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