Implied Gains in Oil Field Services Stocks May Not be Real (SLB, HAL, BHI, RIG, NOV, WFT)

Share prices for the oil field services companies dipped in late July shortly after many of the companies had posted new 52-week highs. The stocks have been struggling since then, primarily as a result of falling forecasts for global demand growth in 2012. Both the International Energy Agency and OPEC have been cutting growth estimates for next year based on continuing overall weakness in the global economy.

In its November report, OPEC cut its estimate of world economic growth in 2012 from 3.7% to 3.6%, though the cartel did leave its oil demand forecast unchanged at 1.2 million barrels/day, up from 900,000 barrels/day of increased demand in 2011. OPEC expects demand for its crude to rise by 1 million barrels/day next year, and non-OPEC demand to rise by 200,000 barrels/day. The services companies need stronger demand growth if they are themselves to grow.

The six companies we’ve looked at for this report are Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), BakerHughes Inc. (NYSE: BHI), Transocean Ltd. (NYSE: RIG), National Oilwell Varco, Inc. (NYSE: NOV), and Weatherford International, Inc. (NYSE: WFT). All have market caps greater than $10 billion, even though share prices have fallen by a minimum of -1% since the end of July.

All data from Yahoo! Finance, and current share prices were gathered just before noon today.

Schlumberger Ltd. (NYSE: SLB) has a median target price of $94.00 from 27 brokers. Shares are trading today at $70.79, for a potential upside of $23.21, or 32.8%. The company pays a dividend yield of 1.3 and has a forward P/E of 14.46. Schlumberger’s target price has dropped from $105 to $94 in just four weeks, and its share price today is barely 1% higher than it was then. The company missed expectations on its last earnings report and the weaker demand and economic forecast going forward continues to put pressure on the stock. The company’s target price is in no imminent danger of being reached. In fact, the target will likely be revised downward again before the company reports fourth quarter earnings. EPS estimates for the fourth quarter have fallen by $0.10 in the past 60 days.

Halliburton Co. (NYSE: HAL) has a median target price of $53.50 from 28 brokers. Shares are trading today at $35.93, for an implied gain of $17.57, or 48.9%. The company pays a dividend yield of 0.9% and its forward P/E is 8.84. Halliburton’s target price has fallen from $63.00 to $53.50 in the past four weeks, even though the company managed to beat third quarter EPS and revenue estimates. The company has put a lot of eggs in the shale gas and oil drilling basket, and that has so far paid off everywhere but in the company’s share price. Fourth quarter EPS estimates have decreased by -$0.04 in the past 60 days and while the implied upside is very attractive, Halliburton certainly won’t get near it.

Baker Hughes Inc. (NYSE: BHI) has a median target price of $76.00 from 25 brokers. Shares are trading today at $54.24, for an implied upside of $21.76, or 40.1%. The company pays a dividend yield of 1% and its forward P/E is 9.82. Like every other stock in this group, Baker Hughes’ target price has dropped in the past month, from $91.00 to its current level of $76.00. The company missed third quarter EPS estimates, but fourth quarter estimates have risen by $0.01 in the past 60 days. The company’s share price today is -4% lower than it was on October 19th, when we last looked at these stocks. Again, the implied gain is not on the table for the current quarter, and likely not for at least part of next year.

Transocean Ltd. (NYSE: RIG) has a median target price of $67.50 from 34 brokers. Shares are trading today at $48.18, for a potential upside of $19.32, or 40.1%. The company pays a dividend yield of 6.4% and its forward P/E is 11.59. Tranocean stock is still weighed down by the company’s exposure to claims related to the Macondo well explosion that killed 11 workers and spilled 5 million barrels of crude into the Gulf of Mexico. Although the company’s target price has dropped from $71.50, its upside potential remains near the same level it was a month ago. Until that spread narrows, the only way Transocean gets nearer its target price is if the target is lowered again.

National Oilwell Varco, Inc. (NYSE: NOV) has a median target price of $88.00 from 24 brokers. Shares are trading today at $67.32, for an implied upside of $20.68, or 30.7%. The company pays a dividend yield of 0.7% and its forward P/E is 11.51. The company raised its quarterly dividend from $0.11 to $0.12 yesterday, boosting its yield slightly. If any of these services companies has a chance to hit its price target, National is the likeliest mainly because its upside potential is the smallest.

Weatherford International, Inc. (NYSE: WFT) has a median price target of $22.50 from 26 brokers. Shares are trading today at $14.95, for an implied gain of $7.55, or 50.5%. The company pays no dividend and its forward P/E is 9.88. Weatherford’s share price today is about -1.3% below its level of a month ago, and its it target price is $1.50 lower. That says about all there is to say about Weatherford’s ability to deliver those implied gains.

Of all these companies, only National Oilwell Varco has much of a chance to deliver on these promises of expected gains. Its price target fell from $95 to $88, putting the target within reach, but not so close that it will be automatic. Even rising crude oil prices aren’t likely to spur a lot more exploration and drilling in the near term, and that’s what National and the rest of this group needs.

Paul Ausick