What a wild ride 2016 has been for the energy industry. We started the year in a downward spiral, with oil prices bottoming in the mid $20s in February, and fought our way all the way back to the current low $50s range following the first OPEC production cut in years. While analysts always factor in a modicum of cheating by the OPEC and non-OPEC nations, the sheer psychology of the cut is good for the overall markets and sector.
A new JPMorgan research report makes the case that the OPEC cut essentially has pushed oil prices to where exploration and production companies were banking on for 2017. They note this in the report:
We expect some cyclical service pricing gains next year, but those don’t preclude the secular deflation from exerting further pressure on the supply chain. Our mid-cycle expectations remain intact and we believe much of the group will struggle to generate positive earnings barring oil north of $60, a headwind for the stocks into 2018.
With that somewhat cautionary tone, and noting that for the first time since 2010 the PHLX Oil Service Sector index (OSX) is poised to outperform the broader market, JPMorgan tends to stick with the biggest players in the industry, which looks like a very solid plan. Six stocks were top picks, and we cover four in depth in this report, starting with giants Halliburton Co. (NYSE: HAL) and Schlumberger Ltd. (NYSE: SLB). That is followed by a look at two of the top small/mid-cap picks from JPMorgan.
Tetra Technologies Inc. (NYSE: TTI) and MRC Global Inc. (NYSE: MRC) also are listed as top picks at JPMorgan. Both are smaller cap companies with outstanding prospects that may be better suited for aggressive growth portfolios.
This company is the top pick for 2017 at JPMorgan, and it is still down almost 30% from highs printed two years ago. 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.
The oil field giant announced last year a $1 billion investment to develop huge potential oil fields in Ecuador and has entered into a long-time deal with Petroamazonas, an Ecuador-based company involved in the exploration and development of the country’s oil reserves. With oil looking to stabilize in the $40 to $50 range, this top oil service company is a great stock to buy on sale, as the oil recovery has shown some legs.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. Revenues in 2015 totaled $27.8 billion and EBITDA was $7.2 billion. For investors looking for an oil field services company to add, this is arguably the best.
Halliburton shareholders receive a 1.34% dividend. The JPMorgan price target for the stock is $63. The Wall Street consensus target is $55.81. The shares closed Wednesday at $53.54.