Home Service company Are oil service companies a buy?

Are oil service companies a buy?


Last week we presented a bearish case for the energy sector assuming that oil and gas stocks could be in danger of overheating. Energy is the 4th most expensive sector according to Shiller’s P/E, and also looks overvalued against gold prices.

It’s a sentiment that has also gained momentum on Wall Street.

Energy traders are confident that this oil market will remain tight given the near-term supply outlook from OPEC+ and the US, but it has been rising steadily. Exhaustion could set in,Ed Moya, senior market analyst at Oanda, warned.

The concern is [high inflation] could be a forward-looking indicator of consumption patterns, and even if gasoline demand is strong right now, it’s a sign in the future that if gasoline prices don’t stabilize, then consumers will reduce“Price Futures analyst Phil Flynn told CNBC when discussing record high gasoline prices.

Luckily, there are still great deals to be had in space, with, Ovintiv Inc.(NYSE: OVV), Civitas Resources, Inc. (NYSE: CIVI), Enerplus Corporation (NYSE:ERF)(TSX:ERF), Western Oil Company (NYSE:OXY) and Canadian Natural Resources Limited (NYSE:CNQ) being among the cheapest energy stocks.

That said, investors may want to know how the current rise in oil prices compares to the rise in 2014, when prices hit $100 a barrel for the very first time.

The chart below compares the current oil and gas highs (blue dots) with the 2014 highs, which are set as a 100% benchmark.

According to the chart, the broader energy sector S&P Energy Select Sector Index (IXE)

is trading just below 2014 levels. However, its two main constituents, ExxonMobil Inc (NYSE:XOM) and Chevron Corp. (NYSE:CVX), represent approximately 23% and 20% of the IXE by weighting, respectively, are trading at par with (Exxon) or above (Chevron) 2014 levels.

However, Oil services, MLP, oil and gas producers, and Half-way are all trading at considerable discounts from their 2014 highs. Oil services appear to be the most undervalued, with the sector trading at a massive over 70% discount from the 2014 high.

Source: Nasdaq

Oil Field Recovery

SFO stocks were already flying high long before the Ukraine crisis.

The change has been most evident in the job market, with OFS companies hiring again.

OFS companies reported that drilling and well completion activity, as well as prices, rose slightly, while thugs also say they are seeing an increase in job vacancies. Oilfield workers were among the demographics hardest hit by the Covid-19 pandemic in 2020. Nationally, the oil and gas industry is believed to have lost 107,000 jobs according to global consultancy Deloitte, with an estimated 200,000 thugs losing their jobs at the height of the global lockdowns.

According to the trade group Energy Workforce & Technology Council (Council), jobs in America’s oilfields have increased over the past year.

Prices should follow soon. Pricing power is returning to niches such as high-spec land-based drilling rigs, with daily rates for these US rigs having already seen an increase of $1,000 per day with more to come.

Halliburton, Schlumberger and Baker Hughes became the first OFS victims of the Ukraine crisis due to their size and brand recognition. However, Rystad Energy’s head of energy services research, Audun Martinsen, told the Financial Times that their smaller counterparts could continue to operate under the radar as they do not directly exploit or export oil and resources. natural.

Here are three OFS stocks to keep on your radar amid the last great US oil boom.

Halliburton Co.

Market cap: $33.9 billion

Cumulative returns since the beginning of the year: 40.5%

One of the largest oil service companies, based in Texas Halliburton Company (NYSE: HAL) provides products and services to the energy industry worldwide, including well completion drilling and appraisal services.

Halliburton provides various production solutions in the areas of exploration, drilling, production software and data management services to upstream oil companies through its Landmark Software and Services product line. In addition, the company’s Testing & Subsea and Project Management product line specializes in reservoir optimization and related technologies. Thailand PTT Exploration and Production and Kuwait Oil Company are among notable oil and gas companies that have awarded Halliburton contracts to implement digital transformation and improve the efficiency and production of their oilfields.

Halliburton is among the international OFS companies that have been caught in the Russian-Ukrainian crossfire. In April, Halliburton announced that she had immediately suspended future activities in Russia and terminate its remaining activities there. Previously, the company halted all shipments of sanctioned parts and specific products to Russia, although the company says it has no active joint ventures in the country.

Fortunately, HAL is not as heavily exposed to the Russian market, with JPMorgan believing that it derives only 2% of its income from the country.

HAL has an average recommendation from Strong Buy analysts. However, its average price target of $31.84 suggests that many analysts believe the stock has limited upside after a torrid rally.

NOV inc.

Market cap: $7.2 billion

Cumulative returns since the beginning of the year: 18.4%

Based in Texas NOV inc. (NYSE: NOV) is a leading global supplier of equipment and components used in oil and gas drilling and production operations, oilfield services and supply chain integration services for the upstream oil and gas industry. NOV was formerly known as National Oilwell Varco.

Wall Street has deteriorated on NOV lately, thanks to valuation and supply chain issues.

Related: US construction sector buoyed by commercial projects

Bank of America issued a double downgrade for NOV stock to underperform the buy with a price target of $22 (up 28.7%).

Russia will only create a tighter global supply chain that could delay the margin recovery story that was central to our bullish thesis. We’re not 100% sure that developments in Russia don’t make sourcing materials like aluminum, copper, nickel and steel more problematic for a company that was already struggling with its supply chain. supply and material cost inflation,” BofA’s Chase Mulvehill wrote.

Citi analyst Scott Gruber downgraded NOV and Cactus (NYSE:WHD) to hold, citing recent outperformance and supply chain challenges. However, the 43.7% gain over 52 weeks of NOV seems relatively moderate compared to the 85.1% of WHD.

Meanwhile, Gruber improved Nabors (NYSE:NBR) to hold, as global exposure and improving drill rate killed its free cash flow thesis.

Precision Drilling Corp.

Market cap: $1.0 billion

Cumulative returns since the beginning of the year: 80.5%

precision drilling company (NYSE: PDS) is a Canada-based company, which provides contract drilling, completions and production services primarily to oil and natural gas exploration and production companies in Canada, the United States and certain international websites.

BMO Capital Markets has distributed upgrades to a number of Canadian oil service companies, including Precision Drilling Corporation, CES Energy Solutions Corp. (OTCPK: CESDEF), Pason Systems Inc. (OTCPK:PSYTF), and Secure Energy Services Inc. (OTCPK:SECYF) as drilling activity intensifies.

“We believe the sector is poised to reach multi-year levels of activity, while prices continue to rise,” he added. John Gibson, an analyst at BMO Capital Markets, wrote in a note to clients titled “Glory Days Ahead, but Expect Volatility to Continue.”

Gibson says Precision, CES and Pason each have high market share in North America, leverage to increase business levels and strong free cash flow generation capabilities.

Another key attraction: low leverage.

Precision Drilling is aggressively repaying its debt and says its debt reduction plans will continue with the goal of repaying more than $400 million of debt over the next four years and achieving a sustained net debt to adjusted EBITDA ratio of less than 1.5x. Precision succeeded in reducing total debt by $115 million in 2021 and, by 2025, expects to have reduced debt by more than $1 billion since 2018.

But it won’t come at the expense of shareholders: Precision also says it plans to allocate 10-20% of free cash flow before debt principal payments to return capital to shareholders.

By Alex Kimani for Oilprice.com

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