If any sector has been familiar with boom and bust cycles it is oil and oil services, and if things stay on the same course they are on now, one Wall Street firm thinks that it could be 2017 before a recovery will begin. SunTrust Robinson Humphrey has examined both the bull and bear case for the sector. The firm sees the most plausible outcome being a 2017 recovery. For rig activity, it expects this year to be down 31%, next year flat, and the turnaround in 2017, up 11%. While that would be encouraging, 965 rigs operating in 2017 would still be 25% below the 2014 average.
The SunTrust team encourages investors to own stocks in companies that help exploration and production companies make better wells. That is a simple but very smart plan of attack, as well efficiency and cost maintenance should remain crucial. We screened the list of stocks that SunTrust likes under the base case and worst cases scenarios for the industry. Those stocks rated Buy are Core Laboratories N.V. (CLB), Dril-Quip Inc. (NYSE: DRQ), U.S. Silica Holdings Inc. (NYSE: SLCA) and Superior Energy Services Inc. (NYSE: SPN).
This leading provider of proprietary and patented reservoir description, production enhancement and reservoir management services used to optimize petroleum reservoir performance has more than 70 offices in more than 50 countries located in every major oil-producing region in the world.
Core Laboratories’ stock has been cut in half over the past year and may be providing investors with a longer term time horizon perhaps the best entry point in the past decade.
Core Laboratories investors are paid a solid 2.1% dividend. SunTrust raises its price target for the stock to $115 from $110. The Thomson/First Call consensus price target is set at $113.92. Shares closed up almost 6% last Thursday at $112.30.
Dril-Quip is another top oil field services company that SunTrust likes and some analysts on Wall Street feel is a solid takeover candidate. The company is a leading manufacturer of highly engineered offshore drilling and production equipment, which is well suited for use in deepwater, harsh environment and severe service applications.
The company announced solid fourth-quarter results, and it clearly looks poised to handle the downturn as good as or better than most of the competition and peers.
SunTrust lifts the price target for the stock from $80 to $84, while the consensus target is $81.23. Shares closed trading last week at $68.34.
Though lacking the uber-high yield of some of its peers, U.S. Silica is also considered one of the premier frac sand companies in the industry. It is a leading producer of commercial silica used in the oil and gas industry, and in a wide range of industrial applications. Over its 115-year history, U.S. Silica has developed core competencies in mining, processing, logistics and materials science that enable it to produce and cost-effectively deliver over 260 products to its customers across all end markets.
The company posted solid earnings, but left Wall Street analysts with an outlook that, while not horribly negative considering the state of the current industry, did concede that this year will be challenging.
U.S. Silica shareholders are paid a 1.4% distribution. The SunTrust price target is lifted from $37 to $41, and the consensus target is $40. The stock closed Thursday at $35.69.
Superior Energy Services
This company 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.
Some Wall Street analysts feel that the company should benefit on both the pumping and well service side of the industry, as business and competition increases. They also feel that Superior could be the single biggest beneficiary of potential divestitures coming from the Baker Hughes and Halliburton merger.
Superior investors are paid a 1.4% dividend. The SunTrust price target is posted at $25, and the consensus target is $25.41. Shares closed the trading day on Thursday at $22.91.
With three possible scenarios, it is better to go with the base case and the bear case winners. The bottom line is that if OPEC reduces production, U.S. cuts hit and the sector rallies in 2016, all these companies should do well anyway.