In the first half of 2017 only one sector in the S&P 500 was down and that was energy. When the price of West Texas Intermediate crude plunged toward the low $40s from the $55 a barrel high printed in April, the bears got noisy. Despite the growls, oil has rebounded, and those who hopped in the sector in late June have done well. The question for most investors is simple: Is this the top of the range, or can we break out? The answer is not so simple.
A new research report from the oilfields services team at RBC says that going forward we could see a 100 oil rig swing up or down, but if the count does decline, the rigs that get weeded out will be of the less efficient nature. That said, the analysts feel that the super-spec rigs will remain in high demand, fully utilized, and day rates will go higher.
It is important to note that two of the RBC picks are frac sand stocks that have been absolutely mauled, and they may continue to, as one reported poor second-quarter results. We screened the RBC oilfield stock universe and found four stocks rated Outperform with massive upside potential. While not suitable for all accounts, for those with higher risk tolerance these stocks could be huge winners for patient investors with a long horizon.
This company provides drilling and rig services and is a top small to mid cap pick. 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.
Top Wall Street analysts have stated that they think 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. In addition, the international exposure the company has helps to provide more stability.
Nabors investors are paid a 3.12% dividend. The RBC price target for the shares is $14. The Wall Street consensus price objective is $13.11, and shares closed Monday at $7.71.
Independence Contract Drilling
This smaller cap company has big upside potential and has been rumored as a buyout candidate. Independence Contract Drilling Inc. (NYSE: ICD) provides land-based contract drilling services for oil and natural gas producers in the United States. The company constructs, owns and operates a fleet of shale drilling rigs to optimize the development of various oil and gas properties in the Permian Basin. As of December 31, 2016, it had 12 rigs.
While the company reported a second-quarter loss, the utilization of the company’s fleet of drilling rigs increased. Chief Executive Officer Byron Dunn noted this when results were released:
We currently have our entire fleet contracted, with our 14th rig scheduled to spud its first well by the end of the month under a multi-year contract. We believe the U.S. fleet of pad-optimal rigs has reached full effective utilization, and dayrates have improved to the high teens – low $20,000 per day range. We continue to have success recontracting rigs on term contracts at improving rates.
RBC has a stunning $7 price objective, but the consensus target price is higher at $7.38. The shares closed Monday at $3.87.