The one sector that lagged horribly last year is putting on a show to start 2018, and investors who are long energy are continuing to add to positions. While the breakthrough of $60 a barrel for West Texas Intermediate and $70 for Brent crude is big, there is a good chance that the market could go sideways for a while to digest some of the robust gains in the benchmark indexes.
A new Merrill Lynch research report makes the case that tight fracking markets combined with loose credit is very supportive for the oilfield services group, and with some big sector players coming in with solid results for the quarter, it could be full speed ahead for some of the top companies.
The Merrill Lynch analysts remain positive on the U.S. land-based companies, and three are top picks for investors now.
This stock is still down some from highs printed last January, but it remains a top large-cap oil services pick at Merrill Lynch. 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 fourth-quarter results that topped analysts’ estimates, driven by better pricing and increased activity in every reporting region. The analysts are very positive and noted this when the earnings came in:
Fourth quarter EBITDA and earnings per share beat the highest consensus estimates on robust review, with particular strength internationally. The company’s revenue trajectory exceeded Schlumberger’s fourth quarter detail from Friday. We will be keen for more color on the pricing environment. Haliburton continues to be our top pick among large cap, integrated services for its outsized U.S. shale position.
Halliburton shareholders receive a 1.28% dividend. The Merrill Lynch price target for the shares is $59. The Wall Street consensus is $55.19, but shares closed Tuesday at $56.83.
This company provides drilling and rig services, and some feel it could be a takeover target. Nabors Industries Ltd (NYSE: NBR) owns and operates the largest land-based drilling rig fleet in the world, and it is a leading provider of offshore platform workover and drilling rigs in the United States and select international markets. Revenues in 2016 were $2.23 billion.
Nabors markets approximately 400 rigs for land-based drilling operations in the United States, Canada and approximately 20 other countries worldwide, and 41 rigs for offshore drilling operations in the United States and internationally.
While the stock has rallied off the lows, Nabors is still down over 50% from highest levels posted a year ago. This concern has been exacerbated recently by a softer-than-expected third-quarter earnings report and focus on 2018 non–cash deferred revenues. While most don’t see a quick fix for the company, the worst surely looks to be over.
Merrill Lynch applauded the company’s recent debt deal and noted this:
Nabors took advantage of attractive credit market conditions with an $800 million debt offering to address near-term maturities. The offering removes an overhang on the stock by addressing its maturity with refi rather than prior plans to use the revolver. We remain at a Buy rating and feel the company should be a key beneficiary in a $60 barrel oil environment.
Investors are paid a 2.96% dividend, which could be lowered going forward. Merrill Lynch has a $10 price target, and the consensus price objective is $8.96. Shares closed on Tuesday at $8.12.
This company could see meaningful business coming from Canada this year and is on the Merrill Lynch US 1 list. Patterson-UTI Energy Inc. (NASDAQ: PTEN) 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. Patterson is expected to report earnings on February 8.
Investors receive just a 0.33% dividend. The whopping $35 Merrill Lynch price target compares with a consensus price objective of $26.87. The shares closed Tuesday at $24.52.
These are three top stock picks from a sector that appears to really be heating up. Investors may want to buy partial positions now and see if the end of earnings reporting season doesn’t offer a pullback from current levels.