Energy investors have been on one of the biggest roller-coaster rides over the last three years, and it looks as though they may have to stay on for the foreseeable future. With OPEC countries’ compliance to production cuts waning, and shale producers in the U.S. still going all out, the oversupply issue remains front and center. The good thing for investors is the lower price deck for oil in 2017 and 2018 is now being priced in.
Another bright area for domestic producers is the potential for oil and liquid natural gas exports to ramp up dramatically over the next few years. In a new research report from RBC, they note that Wall Street now sees the writing on the wall, and they said this in their report.
Oilfield services stocks are now pricing in a 19% reduction to Wall Street EBITDA estimates in the U.S. and 23% in Canada. Of note, U.S. frac sand and land drilling stocks imply 53% and 35% estimate reductions, respectively.
The best route for investors looking to take advantage of the selling in the sector may be to stay with large-cap diversified leaders, and wait for smaller more aggressive plays when the sector trend looks better. RBC has four stocks rated Outperform.
Baker Hughes, a GE Company
The merger of the Baker Hughes and General Electric Company (NYSE: GE) received final approval, and this is the new entity. Baker Hughes, a GE Company (NYSE: BHGE), is a provider of integrated oilfield products, services and digital solutions. The company’s products and services include upstream, midstream, downstream, industrial and digital.
The company’s upstream includes evaluation, drilling, completions and production. Midstream enables the power and compression efficiency for LNG and pipeline and storage. Downstream builds reliability and safety into process operations that includes refining and petrochemical and fertilizer solutions.
The company’s industrial solutions offer power generation to advanced control systems and sensing technology that boost industrial facilities. Digital transformation integrates data on an open platform with security and scale. Baker Hughes’ digital transformation enables field services with real-time insights.
At least so far, analysts seem to like the combination of the two sector leaders and have a healthy $54.50 price objective. The Wall Street consensus price target is set at $57.41. The shares closed Monday at $37.64. The implied return is almost 50%.
This company is still down almost 25% from highs printed for this year in January. Halliburton Company (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.
Halliburton is the second-largest provider of oil services and the number one pressure-pumping services provider worldwide. For investors looking for an oil-field services company to add, this is arguably the best, and top analysts believe they will benefit as the frac market has tightened significantly, and prices are 20% to 30% off the lows.