If any sector sputtered in 2019 it was energy, and the oilfield services stocks joined in for the disappointment. But what a difference a year can make. With both West Texas Intermediate and Brent crude trading over the $60 a barrel mark to start 2020, and a host of potential positives in the queue for the next 12 to 18 months, there could be some big money to be made in the top stocks in the services group.
In a new research report, Stifel feels there are indeed a host of positives in 2020 that could lead to strong 2021 earnings growth, and while some would be inclined to wait, it’s important to remember that the pros on Wall Street anticipate future developments and buy in advance.
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In the report, the Stifel team listed six specific factors that could help the oilfield services arena. All are very positive forward metrics for the battered sector.
- The reflation trade that favors cyclicals, as highlighted by Stifel’s U.S. Equity Strategist Barry Bannister.
- An end to the downward estimate revision cycle for oil service stocks.
- Weakening U.S. oil production growth.
- Pressure pumping fleet attrition.
- Continued underinvestment by oil service players.
- Positive free cash flow generation.
Stifel is especially bullish on four top companies, two of which reside on the firm’s Select List of top stock picks. All four are rated Buy at the firm.
Baker Hughes
The analysts at Stifel made a big move by adding Baker Hughes Co. (NYSE: BKR) to the firm’s well-respected Select List of stocks to Buy. This is big as energy and oilfield services stocks have suffered last year while the major indexes have delivered 20% returns.
Baker Hughes is an international industrial service company and one of the world’s largest oilfield services companies. It provides the oil and gas industry with products and services for oil drilling, formation evaluation, completion, production and reservoir consulting.
General Electric recently gave up majority control of the company, selling shares that raised about $3 billion cash but triggered a more than $7 billion accounting charge. Stifel noted these positives in its report:
Strong free cash flow expected; rising international oilfield activity should drive margin improvement in Oilfield Services segment, robust LNG order flow creates solid visibility for Turbomachinery & Process Solutions business; GE ownership falling; and balance sheet remains strong.
Baker Hughes shareholders receive a solid 2.81% dividend. The Stifel price target for the shares is $31, while the Wall Street consensus target is $29.04. The stock closed most recently at $25.61 per share.
DMC Global
This off-the-radar company offers big upside to the Stifel price target. DMC Global Inc. (NASDAQ: BOOM) engages in the provision of technical products and services in the energy, industrial and infrastructure markets. It operates through the following segments.
The NobelClad segment produces explosion-welded clad metal plates for the construction of corrosion-resistant industrial processing equipment and specialized transition joints. The DynaEnergetics segment designs, manufactures and distributes products used by the global oil and gas industry, principally for the perforation of oil and gas wells.
The analysts pointed out some important items in the Stifel report:
Leading integrated perforating gun system; overall market rapidly adopting integrated perforating solutions over components; Free-cash-flow likely turns positive in 2020-21 following facility investments in 2018-19; and possibility of an acquisition exists although we believe management will remain very disciplined adding a business line.
Investors in DMC Global receive a 1.11% dividend. The bullish $59 Stifel price objective compares to an even higher Wall Street consensus target price of $64.50. The last trade on Thursday was recorded at $44.93.
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