Energy

Jefferies 5 Top Buy-Rated Oil Field Services Stocks for 2018

Lee Jackson

Published: January 5, 2018 10:50 am

Last Updated: January 12, 2020 4:48 am

After a dismal 2017, in which the energy sector declined 4% versus an almost 20% gain for the S&P 500, the group looks poised to have a much better year in 2018. Benchmark West Texas Intermediate crude is now through the $60 a barrel level for the first time in almost three years. With the OPEC production cuts helping to thin out bloated inventories, and demand remaining very robust, the oil service companies may be set for a very solid year.

In a new research report from Jefferies, while they are very positive on the potential for the oil field services stocks in 2018, they remain cautious in their stock selection, and clearly prefer the North American companies as that is where the preponderance of the growth should be. They noted this in the report.

We see upside in oilfield services shares given (1) our Energy Team’s positive bias for oil prices in 2018 and (2) reasonable 2018-19 consensus. Issues that have overhung OFS can gradually lift, we think, with visibility on extended cyclical recovery. But we are somewhat selective, including retaining our preference for North American exposure.

Halliburton

This stock is still down over 20% from highs printed a year ago but remains a top large cap oil services pick at Jefferies. Halliburton Co. (NYSE: HAL) 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% due to a “strengthening of market conditions” in the region.

Halliburton shareholders are paid a 1.41% dividend. The Jefferies price target for the shares is $57. The Wall Street consensus target is $53.16, and shares traded Friday at $51.20.

C&J Energy Services

This smaller cap company is well liked across Wall Street desks and is another top pick for 2018 at Jefferies. C&J Energy Services (NYSE: CJ) is a completion and production services company that provides well construction, well completions and well services to the oil and gas industry.

The company also manufactures, repairs and refurbishes equipment used in the oilfield services industry. It operates in various North American onshore basins. Its Completion Services segment includes the hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services. Its Well Support Services segment includes services, including rig services, fluid management services and other special well site services.

C&J trades below ProPetro and also below the average of the other pressure pumpers. Top analysts believe its coiled tubing and cementing businesses could be higher returning than fracking and continue to generate healthy free cash flow generation for the company in 2018.

Jefferies has a $40 price target, and the posted consensus target is $39.77. The stock traded Friday at $33.90 per share.

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Keane Group

This top pick is somewhat off the radar for most energy investors. Keane Group Inc. (NYSE: FRAC) is one of the largest pure-play pressure pumping companies in the United States, with the bulk of its revenue derived from its hydraulic fracturing and wireline businesses. It operates solely in the United States with a presence in many of the major shale basins. Revenues in 2016 were $421 million.

Jefferies likes the stock as it has slightly underperformed its peers and may be offering a solid value at current levels. The company recently announced a new asset-based revolving credit facility that expands Keane’s total availability by $150 million to a total of $300 million, subject to a borrowing base. In addition, subject to approval by the applicable lenders and other customary conditions, the new asset-based lending facility allows for an increase in commitments of up to an additional $150 million, up from a previous amount of up to $75 million.

The $24 Jefferies price target compares with the consensus target of $20.93. The shares were last seen at $18.75.

Precision Drilling

Canada’s leading oilfield services firm provides contract drilling, well servicing and strategic support services to its customers. Precision Drilling Corp. (NYSE: PDS) provides customers with access to an extensive fleet of contract drilling rigs, directional drilling services, well service and snubbing rigs, coil tubing services, camps, rental equipment and water treatment units backed by a comprehensive mix of technical support services and skilled, experienced personnel.

Despite the company’s large Canadian exposure, 54% of its U.S. drilling fleet is located in the Permian Basin, which remains the hottest shale area in the United States. This stock may be a top pick for aggressive accounts looking for low-priced stocks to gain more shares.

The analysts had this to say in the research report from last year:

Precision Drilling remains largely a balance sheet deleveraging “story” and the fact that it lowered 2017 estimated Capex by Canadian $34 million and reaffirmed its goal to reduce net debt by Canadian $300- $500 million over the next 3-4 years (we believe this is achievable) is more reassuring to investors and allows for more value accruing to equity holders over the longer term. We have also been impressed by the success of its efforts to reduce rig level operating expense in The U.S., which is manifest as higher activity allows for better fixed cost absorption.

Jefferies has set its price objective at $4.50. The consensus target price is $4.31, and shares were trading at $3.25.

U.S. Silica

This stock has been absolutely smoked but has awesome upside potential. U.S. Silica Holdings Inc. (NYSE: SLCA) is a leading producer of commercial silica used in the oil and gas industry and in a wide range of industrial applications. Over its 117-year history, it has developed core competencies in mining, processing, logistics and materials science that enable it to produce and cost-effectively deliver over 200 products to the firm’s customers across all end markets.

The company currently operates nine industrial sand production plants and eight oil and gas sand production plants. With the price of oil stabilizing, many of the short-sellers that targeted the frac sand companies may be starting to cover their positions. Toss in increased shale activity this year and this could be a big winner.

Shareholders are paid a 0.75% distribution. The Jefferies price target is $43. The consensus target is $43.98, and the stock traded at $36.90 a share.

These five top oilfield services plays look not only like solid picks but good value buys for 2018. With earnings reporting for the fourth quarter not that far away, it makes sense to buy partial positions now and wait to see how the results come in.