Energy

Deutsche Bank Has Big 2018 Oilfield Services Call: 5 Stocks to Buy

Lee Jackson

Published: December 21, 2017 10:15 am

Last Updated: January 12, 2020 5:14 am

One thing that the huge collapse in oil prices from 2015 to 2016 did that was positive was to remind the top companies to keep from getting overextended. The euphoria over $100 a barrel oil was hard to contain, but those who managed to stay within their budgets and not get out over their skis were the first to bounce back as price rallied off the $26 floor.

A new Deutsche Bank research report makes the case that the setup for oilfield services stocks going into 2018 is much better than last year. While sentiment is still somewhat negative, the analysts feel that growing capital expenditure budgets and tightness in the frac markets could push pricing higher for the top companies as early as the first quarter of 2018. The report said this:

Lower for longer oil prices are making it easier for E&Ps to stay on script, but it remains unclear how markets will value lower growth, free cash flow neutral or marginally positive E&Ps. While full year 2018 capex budgets discounting $50 oil and $3 gas will likely be conservative as they are announced in the coming months (up about 5% collectively), we believe there is upside to 10% growth in 2018 if oil prices stay above $55, but with the delta in spending being in completion services as opposed to any material shifts in drilling plans.

The Deutsche Bank team has three top picks for 2018 Halliburton Co. (NYSE: HAL), Patterson-UTI Energy Inc. (NASDAQ: PTEN) and C&J Energy Services Inc. (NYSE: CJ). And we added two more also rated Buy that look like top plays for next year: Core Laboratories N.V. (NYSE: CLB) and Superior Energy Services Inc. (NYSE: SPN).

Halliburton

This stock is still down over 20% from highs printed last January but remains a top large cap oil services pick at Deutsche Bank. Halliburton is one of the world’s largest providers of products and services to the energy industry. It 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.

Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. For investors looking for an oilfield services company to add, this is arguably the best, and analysts feel it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows.

The company posted solid third-quarter results that topped analysts’ estimates, driven by better pricing and increased activity in North America, its biggest market. Revenue from North America surged 91% to $3.16 billion in the three months ended September 30, due to a “strengthening of market conditions” in the region. Total revenue rose 42% to $5.44 billion. Net profit attributable to Halliburton rose to $365 million in the quarter from $6 million a year earlier.

Halliburton shareholders receive a 1.52% dividend. The Deutsche Bank price target for the stock is $54. The Wall Street consensus target is $52.84, and shares traded early Thursday at $47.30.

Patterson-UTI Energy

This company could see meaningful business coming from Canada this year and it is another top pick at Deutsche Bank. Patterson-UTI Energy is the second-largest land driller in North America and a large pressure pumping provider. Its operations are particularly focused in the Marcellus and in Texas.

Patterson-UTI and its subsidiaries operate land-based drilling rigs in oil and natural gas producing regions of the continental U.S. and western Canada. Universal Pressure Pumping, Inc. and Universal Well Services, Inc. provide pressure pumping services primarily in Texas and the Appalachian region. For the three months ended September 30, the company had an average of 161 drilling rigs operating.

The company remains the fifth largest Pressure Pumper with a 1.5 million HHP frac fleet (currently 83% utilized) with exposure to ancillary rental equipment business through Great Plains Oilfield Rental. The recent acquisition of MS Energy (directional drilling) complements its contract drilling business and provides attractive growth opportunities for investors.

Investors receive a 0.4% dividend. The Deutsche Bank and Wall Street consensus price objectives are both $25. The shares traded at $22.40 Thursday morning.

C&J Energy Services

This smaller cap company is well liked across Wall Street desks and is another top pick for 2018 at Deutsche Bank. C&J Energy Services is a completion and production services company that provides well construction, well completions and well services to the oil and gas industry.

The company also manufactures, repairs and refurbishes equipment used in the oilfield services industry. It operates in various North American onshore basins. Its Completion Services segment includes the hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services. Its Well Support Services segment includes services, including rig services, fluid management services and other special well site services.

C&J trades below ProPetro and also below the average of the other pressure pumpers. Top analysts believe its coiled tubing and cementing businesses could be higher returning than fracking and continue to generate healthy free cash flow generation for the company in 2018.

Deutsche Bank has a $41 price target, while the consensus target is $39.68. Shares were last seen trading at $33.20.

Core Laboratories

This is a top mid-cap pick that is still trading well below highs printed last spring. Core Laboratories provides reservoir description, production enhancement and reservoir management services to the oil and gas industry in the United States, Canada and elsewhere. It operates through three segments.

The Reservoir Description segment comprises the characterization of petroleum reservoir rock, fluid and gas samples. This segment offers analytical and field services to characterize properties of crude oil and petroleum products to the oil and gas industry.

The Production Enhancement segment includes services and products relating to reservoir well completions, perforations, stimulations and production. This segment offers integrated services to evaluate the effectiveness of well completions and to develop solutions to enhance the effectiveness of enhanced oil recovery projects.

The Reservoir Management segment combines and integrates information from reservoir description, as well as provides production enhancement services to increase the production and improve recovery of oil and gas from its client’s reservoirs.

Shareholders receive a 2.18% dividend. The $109 Deutsche Bank price target is less than the consensus target of $110.40. The shares were trading at $105.40.

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Superior Energy Services

Superior Energy Services serves the drilling, completion and production-related needs of oil and gas companies worldwide through its brand name drilling products and its integrated completion and well intervention services and tools, supported by an engineering staff who plan and design solutions for customers.

The company is a favorite mid-cap stock to play the U.S. land services recovery, and analysts think investors should see impact of cost reductions as this year ends and we head into 2018, which some feel could help offset pricing pressure. The sector downturn in 2016 and 2017 led to reductions in capex and capacity attrition, a positive for the survivors like Superior, that have managed both extremely well in what has been a very difficult environment.

Deutsche Bank has set its price target at $10, while the consensus target is $11.60. Shares traded at $9.20.

These are five stocks to buy for big potential gains in 2018. They run the risk gamut so investors need to match their capital investment to their risk tolerance. One thing is for sure, the sector offers far more value than many and makes sense to buy now.