Oilfield Services: Banc of America lowers its view of the Oilfield Service sector to Underweight from Overweight and recommends selling the group, as it believes that the latest stock price cycle for the group is ending. Firm sees a number of factors impacting the stocks, including the deceleration of the U.S. rig rate of change, which is a primary predictive indicator of activity; firm also sees U.S. rig count dropping by 5%, driven by a drop in commodity prices over the next several qtrs as supply/demand converges, all of which should lower the valuation multiples and stock prices. Firm downgrades SLB, BJS, CAM, CLB, FTI, SII, VRC, WFT, GW, NBR, PTEN, DO, ESV, GSF, PDE, RDC, and RIG
What It Means:
In conjunction with the shift to an Underweight rating for the oilfield services sector, Banc of America sets the sector price appreciation potential at (-12%) Why the Call Should Move the Stock(s)
Senior analysts driving the ratings change, James Wicklund and Douglas Becker, have solid reputations for EPS estimate accuracy for trailing two fiscal years and four quarters on majority of the stocks that were downgraded in conjunction with the sector call [source: StarMine] Not often you hear analysts recommend selling a group... the overtly bearish recommendation will carry added influence given their solid reputation for EPS forecasting and the limited use of that recommendation With crude futures topping $39/bbl yesterday, the timing of today's sector downgrade is apt to fuel concerns that firm has it right in suggesting the stock price cycle for the group is ending... notes that this is NOT just a seasonal downgrade, though often the cycle peaks and rolls over at seasonal high-points Outperformance of OSX Index (+12.3% YTD; up about 85% since stock price cycle began in Sept. '01) will expose sector as source of funds candidate as market probes for better risk-reward plays amid concerns over rising interest rates prompting multiple compression (saw this yesterday with CIBC's downgrade of the Gaming sector) Sidenote:
Banc of America adds that while it is constructive and positive on the longer-term growth in hydrocarbon demand and the drilling/production efforts to meet that demand, the industry is cyclical with high volatility.... notes the more defensive names are the larger-cap, internationally focused, and/or deepwater plays but if you don't have to own them, don't for a while
What a load of BS! This is a bold-faced attempt to accumulate shares of energy co's. Fossil fuel and ng are finite natural resources. Global DEMAND is virtually spiraling up (thanks China). This looks to me liike a short term ploy to get 'little guys' out. My advice: Buy on the 'dips'. Has your energy gotten cheaper?