Merrill Lynch on Oil Service Stocks: Mexico Oil Opportunity May Rival Middle East

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In 2012 there were 1,139 onshore and 60 offshore wells drilled in Mexico, for about $8 billion of drilling and completion (D&C) spending. This includes about $1.7 billion in offshore D&C spending. The oil service analysts at Merrill Lynch think Mexico energy reforms could drive about $2.5 billion of incremental annual revenues opportunity. They also believe Mexico will be able to add 50 onshore rigs and 20 floaters in two years time. The large oil services companies generate about $40 million in revenue per rig on average in Mexico and other parts of Latin America. Merrill Lynch says the time to buy the big oil services companies is now.

Baker Hughes Inc. (NYSE: BHI) generates 45% of its total revenue through international operations. The company also posted a solid second quarter, with revenues growing 3% and 5% over the first quarter. Merrill Lynch has posted a $59 price target for the stock. The Thomson/First Call estimate stands at $54. Investors are paid a 1.3% dividend.

Cameron International Corp. (NYSE: CAM) is a top stock to buy and recently showed up on the Goldman Sachs Group Inc. (NYSE: GS) list of the 40 cheapest stocks. Cameron is a specialist manufacturer of high specifications of subsea systems and blow-out preventers for the offshore drilling companies. Merrill Lynch has a $73 price target for the stock, and the consensus figure is at $74.

Ensco PLC (NYSE: ESV) specializes in offshore drilling services. The company owns and operates an offshore drilling rig fleet of approximately 74 rigs, including nine drillships, 13 dynamically positioned semi-submersible rigs, six moored semi-submersible rigs and 46 jackup rigs. The Merrill Lynch price target for the stock is $75, while the consensus price objective is lower at $70. Investors do receive a solid 3.4% dividend.

National Oilwell Varco Inc. (NYSE: NOV) is on the top stocks to buy list at many of the Wall Street firms that we cover. Although earnings for the second quarter showed some weakness in margins, the company announced a record backlog of business that stood at a stunning $13.95 billion. Merrill Lynch has a $86 price target posted, and the consensus target is at $84. Investors receive a 1.4% dividend.

Noble Corp. (NYSE: NE) is another name with very bright prospects in Mexico, as the company has one of the largest offshore fleets in the Gulf. Noble performs, through its subsidiaries, contract drilling services with a fleet of 79 offshore drilling units, including three ultra-deepwater drillships and seven high-specification jackup drilling rigs currently under construction. The Merrill Lynch price target for the stock of $47 is the same as the consensus target. Shareholders are paid a 3.5% dividend.

Schlumberger Ltd. (NYSE: SLB) was one of the companies that got an immediate lift in share price when Mexico said it was considering the modification of its state oil monopoly. Merrill Lynch has a $106 price target on the oil services giant. The consensus target for the stock is $96. Investors are paid a 1.4% dividend.

Weatherford International Ltd. (NYSE: WFT) has been a frustrating stock for many investors over the years. While the company offers a wide range of global capabilities, including a proprietary system for pressure management in the mushrooming arena of subsea production, it continues to be plagued by tax and ethics issues. Merrill Lynch still likes the prospects and has an $18 price target. The consensus is at $16.

While this was not a part of the call, these companies and others have a significant weighting and influence in the Market Vectors Oil Services ETF (NYSEMKT: OIH). This ETF had been beaten down handily, but it has recovered and is within a couple of percentage points of a 52-week high again.

Mexico’s oil output has declined over the past eight years, which is sparking the change in government sentiment. Here is where the Middle East opportunity comes into play. The country has an estimated 15 billion barrels of oil, roughly the same amount as Kuwait, and the government also estimates it could have 27 billion barrels of deep-sea crude oil that could be extracted with the help of large foreign integrated oil companies. All of that oil should bode extremely well for the top oil service stocks that can do business in the Mexican market.

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