Energy

SunTrust Says Plunge in Oilfield Services a Huge Buying Opportunity

Lee Jackson

Published: February 20, 2018 8:20 am

Last Updated: January 12, 2020 3:15 am

While oil has backed up fast since printing multiyear highs in January, it is nothing compared to the huge drop the oilfield services stocks have experienced. The industry was tagged to the tune of almost 20%, which is actually in line with average corrections, and some of the top companies in the industry are at levels that are incredibly attractive.

In a recent report, SunTrust was out aggressively defending the industry and pounding the table of three companies. The report noted this:

We recommend adding to positions in US completion levered names. Group climbing a wall of worry. We expect fear of US production growth to be a fixture this cycle, but remain convinced US supply growth will not swamp the market. Stay focused on US drilling and completion exposure. US spending should grow faster than international for foreseeable future.

The analysts are very bullish on three companies which they have rated Buy. They also have a fourth, very aggressive play or investors looking for a little added leverage on the group.

Halliburton

This stock is still down over 20% from highs printed in January and remains a top large-cap oil services pick at SunTrust. 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, with particular strength internationally. The company’s revenue trajectory exceeded Schlumberger’s fourth-quarter detail.

Halliburton shareholders are paid a 1.52% dividend. The SunTrust price target for the shares is a whopping $69, and the Wall Street consensus target is $63.91. The stock closed trading last Friday at $47.50 a share.

Patterson-UTI Energy

This company could see meaningful business coming from Canada this year, and the stock is down over 20% since January. 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, 2017, 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 are paid just a 0.44% dividend. SunTrust has a $27 price target for the shares, and the posted consensus price objective is $25.65. The shares closed Friday at $18.09 apiece.

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ProPetro

This is a smaller cap stock and it is down almost 30% in a month, but it could be a solid stock for aggressive accounts. ProPetro Holding Corp. (NYSE: PUMP) provides hydraulic fracturing and other complementary services to upstream oil and gas companies, which are engaged in the exploration and production of North American unconventional oil and natural gas resources.

The company operates through seven segments focused on hydraulic fracturing, cementing, acidizing, coil tubing, flowback, surface drilling and Permian drilling. Its pressure pumping segment includes cementing and acidizing operations. ProPetro’s operations are focused in the Permian Basin, and its fleet consists of 10 hydraulic fracturing units with an aggregate of 420,000 hydraulic horsepower.

The $28 SunTrust price objective is well above the posted consensus price target of $22.92. The shares closed trading on Friday at $16.42.

Weatherford

This stock has been absolutely demolished from its 2014 highs, but it may be offering aggressive investors big upside potential. Weatherford International Ltd. (NYSE: WFT) is one of the largest multinational oilfield service companies, providing innovative solutions, technology and services to the oil and gas industry. It operates in over 100 countries and has a network of approximately 1,200 locations, including manufacturing, service, research and development, and training facilities and employs approximately 37,000 people.

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The company offers customers a wide range of global capabilities, including a proprietary system for pressure management in the mushrooming arena of subsea production. The changes in government oil policy in Mexico in 2014 may provide some favorable tailwinds for the company, despite the huge downturn in oil pricing.

The SunTrust team sees the stock as an aggressive call option on oil and the oilfield services sector and explained why:

A commodity derived case for Weatherford it is a cheaper call option on oil than an actual call option on oil. A December 2018 $55/bbl. strike price call option on West Texas Intermediate is trading at over $6 a barrel. Oil prices would have to go above $61 for this call to be in the money, and the value of the call erodes over time as we approach expiration. Weatherford is trading at $2.74/share, and we expect the shares to trade above $4; perhaps much higher, if oil prices are above $60 by December. We think the shares could trade above $4 if oil remains above $50-$55 this year. With asset sales coming, self-help improving margins and cash flows, and the company’s new CEO saying he is comfortable with street estimates, we think the stock offers a better value proposition than a call option on oil.

The SunTrust team has set a massive $6 price target. That compares with the consensus target of $4.90, as well as the most recent closing price of $2.76 a share.

Clearly the negative sentiment and, perhaps, short-sellers have badly damaged the industry. But the fundamentals remain solid, and these stocks are all priced at extremely cheap levels. They make good sense for aggressive accounts looking for alpha opportunities the rest of the year.