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Stock Screen: Oilfield Services and Equipment Stocks With Strong Price Appreciation Potential - December 21, 2011
Over the past several months, the stock market has experienced considerable volatility due to global macroeconomic uncertainty derived from fears of recession and a debt crisis in Europe. Despite this, global demand for oil and gas remains robust, as industrial development and a growing middle class in emerging markets, combined with existing demand in developed countries, accelerate energy consumption. What’s more, fears of a global slowdown have barely made a dent in oil prices, which remain at relatively high levels due to various geopolitical concerns, heavy speculation activity, and tight supply-and-demand conditions. In the absence of price-competitive energy alternatives, demand growth for oil and gas will likely be quite healthy over the long haul. Further, as an escalating number of land fields reach maturity, more and more drilling will be conducted in service-intensive deep water and hostile deep water environments. As a result, companies that provide services such as drilling and well construction to the oil and gas industry stand to benefit greatly over the coming years.
For this screen, we have chosen three companies in the Oilfield Services and Equipment Industry with average projected price appreciation potential in excess of 80% over the next three to five years. Indeed, long-term investors would be prudent to consider shares of Halliburton (HAL), Nabors Industries (NBR), and Weatherford International (WFT).
One of the world’s largest energy services providers, Halliburton operates in around 80 countries. Its Completion and Production division (56% of 2010 sales) offers well cementing, well stimulation, intervention, and completion services. Meanwhile, the Drilling and Evaluation division (44%) provides services to model, measure, and optimize well construction activities. The company’s dividend yield is around 1%.
Recently, Halliburton has been benefiting from the North American land drilling boom, where numerous shale formations that have been opened up by technological advances present an attractive opportunity. Indeed, the company claims some of the industry’s biggest players as its customers and they have not been afraid to sign long-term service agreements. All in all, rising energy demand should provide key support over time. And while Halliburton still has some risk of fines due to its role in the 2010 Gulf of Mexico oil spill, that issue should prove manageable, given the company’s ample supply of cash.
Nabors Industries is the world’s largest land drilling contractor, with 542 land drilling and 730 land workover rigs. Furthermore, it has an offshore fleet consisting of 40 platform rigs, 13 jackups, and 3 barge rigs. Finally, the company provides numerous related oilfield services and invests in select crude oil and natural gas projects.
Recently, the company has experienced a seasonally strong recovery in Canada and high activity levels in the United States. Business is mostly good, with the exception of some delays, downtime, and reworked contracts, mainly in Saudi Arabia. Despite the likelihood that short-term weakness at said operations may well linger through early 2012, these problems should clear up as new contracts kick in. An expected rise in the overseas rig count would be a big plus, too. All told, the increased number of longer-term contracts in force these days, and the fact that more income now comes from higher-margin oil projects (rather than natural gas), augur well for price appreciation in the coming three to five years.
The world’s fourth-largest oilfield services and equipment provider, Weatherford International operates with 10 product lines, 99 manufacturing facilities, and 925 service centers in over 100 countries. In 2010, 70% of revenues were comprised of drilling services, artificial lift systems, well construction, stimulation & chemicals, and integrated drilling.
Recently, Weatherford’s Middle East/North Africa operations, long a steady, high-level performer, have taken a tumble as geopolitical complications in Libya, Egypt, and Algeria are causing disruptions. Nonetheless, these should come back over time, perhaps as early as 2012, as oil is too important to the region’s economy for it not to be produced. Meanwhile, the company’s other geographic segments, North America, Latin America, and Europe/West Africa/ Russia, are more than taking up the slack. Indeed, we anticipate more attractively priced contracts in 2012 if oil demand moves ahead as expected. Too, the company is geared for growth, aiming to duplicate the expansion achieved in the last five years again over the next five, possibly through pursuing acquisitions. All told, earnings could hit an all-time high by mid-decade if the current industry upturn broadens.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.