Oil Patch Exceptions: Two Stocks Drawing Fund Manager Buys

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A lot of energy stocks have frustrated shareholders in recent years with returns so boring or disappointing that many investors lost interest in the sector. But right now, two big players there are attracting some fans.

Oilfield services companies Halliburton (HAL) and Schlumberger (SLB) stand out as popular shares in a sea of the largely ignored. Half a dozen big-name fund managers have bought these shares in the past two quarters, according to datarama, and both carry twice as many buy recommendations from analysts as any other opinion. Shares of both companies leapt this year and Halliburton has been the favorite of late, as seen in a stock chart.

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HAL Chart

These gains come despite continued problems for their businesses on the North American shale fields, the natural gas fields once expected to make energy shareholders rich. Many of those investments backfired when a huge wave of drilling shot down prices throughout the industry, from the product in the ground to the drilling equipment and expertise oilfield services companies supply. Many experts believe the drilling decline there is bottoming out, but in a painfully slow way; almost certainly not in time for companies like Halliburton and Schlumberger to make great profits there this year.

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Henry Hub Natural Gas Spot Price Chart

Both companies, however, are expected to keep busy with offshore and international projects that carry much better profit margins these days than U.S. natural gas drilling. In places like the Middle East, Africa and the Gulf of Mexico, their technology and expertise is in demand as producers seek to cut their costs and to pull more oil and gas out of hard-to-reach places. That’s expected to help overall profit margins.

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HAL Gross Profit Margin TTM Chart

Still, Halliburton is expected to produce little earnings growth this year. Analysts expect significantly more from Schlumberger. Halliburton has more exposure to a rebound (or continued weakness) in North American drilling. It got more than 60% of its operating income from North America last year, while Schlumberger got less than a third of its own from there.

Both companies pay small dividends -- 1.6% dividend yield for Schlumberger -- and can technically afford much more. They have a lot of cash and very low dividend payout ratio. Schlumberger increased its dividend last quarter. Halliburton shareholders have not seen a dividend increase since 2007, and its dividend yield now is barely 1.0%.

The pair stands out not because investors are suddenly putting great faith in these companies – those fund investments in both companies look pretty cautious – but because so much of the energy sector has been considered unattractive lately. Competitor Baker Hughes (BHI) has taken big hits from the North American drilling decline and some contracts in Latin America. Exxon (XOM), typically a favored blue chip, is awash in hold ratings. So are several former favorites in the drilling side of energy, like Nabors Industries (NBR) and Rowan Cos. (RDC). Late last year, opinions from market strategists on the energy sector broadly were pretty mixed.

That sentiment, however, may be improving. Goldman Sachs Group gave a thumbs up to Halliburton and competitor Nabors last week, according to The Wall Street Journal. A harsh winter has boosted confidence in rising natural gas prices, which are already up more than 30% from a year ago.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com.


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