Most oil services stocks have surged in recent months as WTI crude oil prices have pushed as high as $46/bbl following February’s lows around $26/bbl. But should shareholders of the three largest oil services companies in the world, Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI) be taking profits or holding out for more gains?
Goldman Sachs recently updated its outlook for these three stocks. Here’s a look at what the firm had to say about each.
Schlumberger (SLB)
Of the three big oil services players, Goldman is most bullish on “Buy”-rated SLB. Analyst Waqar Syed writes that SLB’s advantages in technical expertise and diversity can be difficult to quantify sometimes, but they should not be discounted from an investment standpoint.
“We note SLB has a number of transformational initiatives in the works making it difficult to fully quantify the potential impact on revenues/costs,” Syed explains.
Goldman also believes that the Cameron International buyout will provide cost synergies and allow SLB to offer customers unique end-to-end integrated solutions.
Syed stresses the importance of data acquisition and mining in the future of the oil industry, and Goldman sees SLB as the clear market leader in that category.
Goldman has raised its price target for SLB to $94, a roughly 30% premium to today’s prices.
Halliburton (HAL)
The $3.5 billion breakup fee HAL agreed to pay BHI earlier this month certainly stings, but Goldman still believes that HAL is extremely well positioned for the future. Goldman is calling for U.S. oil & gas E&P spending to ramp 60% in 2017, and HAL is the best-positioned company to benefit from a rising North American mainland rig count.
In fact, HAL investors may be the first to profit from a recovery in North American activity. HAL has the largest pressure pumper market share (27%) of any of the top oil services companies, and Goldman anticipates that pressure pumping will be the first oil service activity to recover in the U.S. market.
HAL also generated 46% of its 2015 revenues from North America, while SLB, BHI and Weatherford International (WFT) all had less than 40% exposure.
Finally, there is no end in sight for HAL’s aggressive cost-cutting initiatives. Goldman anticipates another $1 billion in cost cuts in 2016 and more to come in 2017.
The firm initiated HAL at “Buy” and set at $46 price target for the stock.
Baker Hughes (BHI)
BHI has already announced that $2.5 billion of the $3.5 HAL breakup fee will be going to buy back $1.5 billion in stock and $1 billion in debt. The cash infusion is certainly helpful, but Goldman believes that a stand-alone BHI has a challenging road ahead.
On the positive side, Goldman likes BHI’s $500 million cost-cutting plan for 2016, the HAL cash has worked wonders for cleaning up the balance sheet and BHI also enjoys relatively high exposure to the U.S. pressure pumping business. Goldman also sees BHI’s planned initiative to take on third-party sales partners in key global markets as a way to potentially improve upon previous shortcomings in sales.
Unfortunately, there is risk in this untested new approach. The performance and reliability of third-party partners is an unknown and BHI will also be exposing its valuable intellectual property to a new set of business partners.
With the stock already up 12%% in the past three months and too many uncertainties ahead, Goldman settled on a Neutral rating for BHI and a $47.50 price target.
Disclosure: as of this writing, Wayne Duggan was long SLB, HAL and BHI.
