The sustained low price of oil finally has gotten to the OPEC member nations, and Wednesday they did something about it. In an unexpected move, the cartel agreed on a preliminary 750,000 barrel-a-day production cut. The actual details of the agreement are expected to be worked out at the official OPEC meeting in Vienna in November.
A new Merrill Lynch research report notes that this effectively will end the Saudi-led production-at-will era that marked the two-year policy switch of defending markets share. For years the Saudis had a longstanding policy of defending oil prices, but the U.S. shale boom blew holes in that.
The Merrill Lynch team feels a production cut in November could push OPEC market share to non-OPEC producers, especially those in the U.S. shales, and that in turn could be big for oilfield services. The analysts are very positive on three top companies that may poised to benefit
This company has ticked higher since the deal with Baker Hughes fell through due to regulators’ concerns, but it is still down almost 45% from highs printed two years ago. Jefferies recently added the company to the Franchise Picks portfolio. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry.
The company serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
The oil field giant announced last year a $1 billion investment to develop huge potential oil fields in Ecuador and has entered into a long-time deal with Petroamazonas, an Ecuador-based company involved in the exploration and development of the country’s oil reserves. With oil looking to stabilize in the $40 to $50 range, this top oil service company is a great stock to buy on sale, as the oil recovery has shown some legs.
Top Wall Street analysts see the end of the Baker Hughes deal as removing uncertainty on the company and also think that the company still has acquisition possibilities that could help expand the business footprint.
Halliburton investors are paid a 1.56% dividend. The Merrill Lynch price target for the stock is $53, and the Wall Street consensus price target is $51.44. The shares closed Thursday at $44.18.
Helmerich & Payne
This company primarily operates as a contract drilling company in South America, the Middle East and Africa. Helmerich & Payne Inc. (NYSE: HP) provides drilling rigs, equipment, personnel and camps on a contract basis to explore for and develop oil and gas from onshore areas and fixed platforms, tension-leg platforms and spars in offshore areas. Its contract drilling business operates through three reportable segments: U.S. Land, Offshore and International Land.
The company posted second-quarter earnings that many felt came in much better than expected. At last report, the company’s U.S. Land rig segment, which is its largest business, had a utilization rate of 31%, compared to 68% this time last year. The International Land operations also saw utilization rates decline to 38%. What is slightly surprising, though, is that the average margin for a rig in use increased between this quarter and the same time last year.
Many top Wall Street analysts feel that the company is one of the best positioned for the U.S. land recovery, and they also cite the strong balance sheet and the sector leading dividend. With OPEC production ebbing, this is a solid play for growth and income investors.
Helmerich & Payne investors receive a 4.29% dividend. Merrill Lynch has a whopping $72 price target. The consensus price objective is $60.14, but shares closed Thursday way above that level at $65.26.
This company also provides drilling and rig services. Nabors Industries Ltd. (NYSE: NBR) offers rig instrumentation, optimization software and directional drilling services. It also provides completion, life-of-well maintenance and plugging and abandonment of a well.
In addition, the company markets approximately 466 land drilling rigs for oil and gas land-based drilling operations in the United States, Canada and approximately 20 other countries worldwide; approximately 445 rigs for land well-servicing and workover services in the United States; 98 rigs for land well-servicing and workover services in Canada; 42 rigs for offshore drilling operations in the United States and internationally; and seven jackup units and components of trucks and fluid hauling vehicles.
Merrill Lynch has stated in the past that concerns over the company’s balance sheet are way overblown, and at current levels the shares are pricing in too modest of an industry recovery. The firm also cites the international exposure, which it sees as providing more stability.
Nabors investors are paid a 2.04% dividend. The Merrill Lynch price target is $14. The consensus target is $12.34. Shares closed Thursday at $11.80.
Three top picks for investors to consider. It may be smart to buy a partial position here and see if the market doesn’t come in some during earnings season. With a plethora of potential market moving events on the horizon, caution makes sense now.