3 Oil Services Stocks to Bail On

The energy patch has been a painful place to reside for the past six months.

oil drilling argentina 630The perfect storm of rising production and dwindling global demand have conspired to push down prices for oil to lows not seen since 2010. Energy stocks have been in a world of hurt as those lower oil prices have translated into poor margins and profits … and for some shale operators, the situation has made drilling completely worthless.

However, the slide in crude oil isn’t affecting all energy stocks the same way. Some are going to feeling it a lot more — for instance, in the oil services industry.

The latest batch of earnings reports from Schlumberger Limited (NYSE:SLB), Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI) highlight some of the near-term issues these oil stocks will face. For instance, the environment has become so toxic, it has warranted the three companies laying off a combined 17,000 workers combined.

So one can’t help but wonder: If the leading oil services stocks are hurting this bad, what’s going to happen to smaller players that don’t have the product breath, technology or pricing power?

For investors in these energy stocks, the answer isn’t pretty.

A Bad Storm Brewing for Smaller Energy Stocks

Lower crude oil prices are having one major effect on the oil service stocks: Energy companies simply aren’t spending like they used to.

After years of splurging on new ambitious projects and horizontal drilling, capex is falling by the wayside. Already, we’ve seen numerous announcements of major reductions in what producers are planning on spending to find and process crude oil. The average cut has been about 25% to 30% lower than 2014’s numbers.

That’s not necessarily such a great thing if you own/operate drilling equipment for hire.

Baker Hughes predicts that the number of drilling rigs in operation will fall by 15% during the first quarter as the capex cuts begin to work through. Typically, the bottom isn’t reached until rig counts fall by around 40%. Some analysts have even postulated that once we hit the bottom, it’s going to take around eight years to get back to the boom days of 2014.

The three big players have begun a slugfest to keep things churning during the downturn. HAL and BHI have agreed to merge in a deal that will create one of the largest oilfield services companies and save billions of dollars. Meanwhile, SLB has continued to make good on being the “global” oilfield services provider by making a big acquisition in Russia. All of these moves — along with rolling out new cost-saving technologies in deepwater and shale drilling — are designed to keep the oil producers coming back to them rather than rivals.

And if they ultimately need to cut prices, HAL, BHI and SLB have the cushion to do so.

But many of the smaller oil services stocks don’t have that luxury. High debt loads, fractional market shares and relatively costly technologies will be the downfall of these firms. At least one analyst calling the upcoming price environment “an all-out depression” for oil service stocks.

In short: The sector could be in a deep, dark funk for some time.

So, who’s got the funk?

3 Energy Stocks Primed for a Continued Fall

For starters, the world could get ugly for Civeo Corp (NYSE:CVEO), Key Energy Services, Inc. (NYSE:KEG) and Patterson-UTI Energy, Inc. (NASDAQ:PTEN).

Civeo: Since being spun off from Oil States International, Inc. (NYSE:OIS), things haven’t gone well for Civeo. CVEO provides temporary accommodations and modular housing facilities for E&P firms’ workers in remote locations. That’s a great niche business to be in when times are booming, but not when layoffs are the norm — as such, CVEO shares have plunged nearly 90% in half a year.

And yet, things still could get worse. Civeo already reported dour occupancy numbers in its third-quarter earnings report back in November. That was before any of the recent big-time layoffs and capex spending cuts were announced. Those poor occupancy numbers were enough for CVEO to cut its 18% dividend and “re-evaluate and pursuing additional revenue opportunities.” Given the new outlook, it doesn’t look good for the niche player.

Key Energy Services: Critical oilfield services — like directional drilling, coiled tubing, fluid management and pressure pumping — are all KEG’s bailiwick. Problem is, they’re also in Halliburton and Baker Hughes’ wheelhouse — and Key Energy can’t compete in a price war with these giants. Adding to KEG’s problems is its hefty debt load. KEG has about $759 million in debt on its balance sheet, giving it a debt-to-equity ratio of 67.6%. As loses continue to mount, that debt will continue to put pressure on Key’s ability to continue operating as an ongoing firm. Already, KEG’s bonds seem to be pricing in that sort of scenario, while multiple analysts have rated it a “strong sell.”

Patterson-UTI: Obviously lower rig counts are bad for firms who specifically are drillers for hire. PTEN is one of the biggest and features a fleet of some of the most advanced walking rigs on the market. Unfortunately, those rig might prove to be a bad investment for PTEN in the near term. Analysts at Credit Suisse recently cut Patterson’s full-year earnings estimates by a whopping 93%. Those kind of cuts haven’t been baked into the stock yet — but it’s coming. Patterson continues to report lower and lower counts for its rigs in service. That won’t sit too well with PTEN’s stock, which should drift lower.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/energy-stocks-oil-services-hal-slb-bhi-keg-cveo/.

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