It May Be Time To Drill Down Into Oilfield Services Stocks

Oil and gas drilling on land is increasing in North America and offshore activity is starting to see signs of life. (Photo by Daniel Acker/Bloomberg)

Despite the woes of sub-$50 per barrel oil, there are some positive indicators beginning to emerge in the oilfield services industry. Growth has returned in the way of increased drilling activity in North America that’s expected to continue through next year. Witness Halliburton’s second quarter earnings results announced today, which beat analysts’ projections on the back of a 20% pickup in its completion and production segment.

Offshore activity is also starting to see some signs of life, particularly in southeast Asia, Africa and even the Gulf of Mexico. “We are now also seeing an increasing number of new offshore projects being prepared for tendering and final investment decision in many of the world’s shallow water basins,” Schlumberger chairman and CEO Paal Kibsgaard said when announcing the company’s second-quarter earnings on Friday.

Some observers still believe that there will be a substantial pullback in capital spending next year, leading oilfield services stocks to be hammered over the past few months. Could now be the time to drill down into some oilfield services stocks?

RBC Capital Markets analyst Kurt Hallead thinks so. Selectivity is key, so he recommends three areas in which to focus: frac sand, U.S. land drilling and Canadian pressure pumping stocks. “At today’s stock prices, we think [they] offer the greatest upside within our coverage universe in a world of $50 oil,” he said in a report Thursday.

Among producers of frac sand, which is used in the drilling process, Hallead likes Fairmount Santrol Holdings and U.S. Silica Holdings. In land drilling, he favors Nabors Industries, Patterson-UTI Energy and Independence Contract Drilling, and in pressure pumping he likes ProPetro Holding.

The analyst also likes the diversified oilfield services providers, including large caps like Halliburton, Schlumberger and Weatherford and small caps Core Laboratories and NCS Multistage Holdings.

Hallead isn’t so enthusiastic about subsea and offshore drilling. He said service companies are working to cut the break-even price of development through cost-cutting, which could spur a pickup in orders next year. But longer term, he thinks the industry needs to see oil prices above $60 per barrel to drive significant exploration activity.

As for offshore, Hallead still thinks it’s too early to make this potential “career-maker” trade, as utilization levels are at all time lows (59% for drillships, 53% for semis and 60% for jackups). “Investors may look to go long as early as 2019 as we expect a four to five year path to 85% utilization,” he said.

Analysts at Seaport Global Securities — which is expecting $40 oil near term — said in a note last week that the U.S. rig count appears to be topping out. But the firm thinks that a large and growing backlog of drilled but uncompleted wells should drive higher demand and pricing for U.S. completion and production-oriented oilfield services stocks for at least the next few quarters. Its favorite company on that front is Halliburton, which it raised to buy from neutral.

SGS agrees that offshore markets remain extremely challenged in a $40 oil world, but it believes high quality names with strong balance sheets should win the day. Those include Oceaneering International and Rowan Cos., both of which the firm raised to neutral from sell last week.