Despite reasonably consistent oil prices and an increasingly favorable overall tolerance for risk, the oil service sector had an ugly year in 2012. After a disastrous first half of the year the sector rallied in the second half to end the year down just over 2%. This was extremely disappointing in a year where the S&P 500 as a whole had double digit gains as did many of the sectors. Investors may want to pay attention here. The cloud appears to be lifting, and it seems very likely that the oil service sector may have turned the corner and can rally in 2013.
The oil service research team at Deutsche Bank A.G. (NYSE: DB) are now convinced that a slow but sure normalization of activity is underway. That renewal of activity they believe will lead to a surprise increase in profitability in 2013 and perhaps beyond. While they are generally in line with global capital expenditure estimates of a 9.4% increase, their estimate of 3.4% North American growth is above consensus.
In an odd twist of irony, the same area that started an aversion to oil field services may prove to be the strongest area of growth this year. The Gulf of Mexico, where the Macondo well disaster happened in April of 2010 may lead the recovery with a 30% increase in spending in deepwater drilling.
The other catalyst seen for a rebound in the sector is a slow but sure recovery in the long suffering natural gas market. While this recovery will not happen overnight the Deutsche Bank analysts are convinced that it will play a part in the overall sector strengthening. That could be a big win for long-term patient investors if these stocks can recover anywhere close to their highs.
In the large cap arena and also as their top pick in the sector, Baker Hughes Inc. (NYSE: BHI) trading today at $42.39 has it’s price target lifted from $55 to $57. That’s the highest estimate on the street where consensus is $48. The other large cap favorite is Halliburton Co. (NYSE: HAL) where they upped the price target to $53 from $51. Consensus is $43.
The top pick in mid-caps is Nabors Industries Ltd. (NYSE: NBR). Trading today at $14.91 the target price is $27 up from $25. That is significantly above Thomson/First call estimate of $17.50.
The name in small-caps that is their top pick is Hercules Offshore Inc. (NASDAQ: HERO). Trading today at $6.68 the target price is $8. This is one name where they did not increase the price target. The street consensus is target is $7
In their report Deutsche Bank also raised the price targets for Basic Energy Services Inc. (NYSE: BAS) from $16 to $17. Trading today at $11.75 the street estimate is $12. Patterson-UTI Energy Inc. (NASDAQ: PTEN) from $27 to $28. Trading at $19.02 the street is at $20. Cameron International Corp. (NYSE: CAM) from $76 to $78. Trading at $58.75 with the street at $66.50. Finally, Weatherford International (NYSE: WFT) from $20 to $21. Trading at $11.92 the street forecast is $13.
From judging by the street consensus versus the Deutsche Bank price targets on most of these names, this is clearly a very bullish call. But with oil prices continuing to rise and natural gas firming it make’s sense to put investment dollars to work in a sector that had very poor price performance last year.