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).
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.
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.