Companies are increasing production and shedding debt
Getty ImagesThe time is right for a multiyear expansion for certain oilfield-services companies, including Halliburton, says Credit Suisse analyst James Wicklund. DMAMBMCMDMEMGPREVIEWZBZBRZDZDRZFZGZQZRZSZTZU
After a difficult 2017 for the energy sector, this is the right time for investors to buy shares of oilfield-services and equipment companies, according to Credit Suisse analyst James Wicklund.
Shares of oilfield-services companies plummeted as crude oil prices tumbled in 2014 and 2015. But as oil rallied in 2016, the stocks were even more volatile than the commodity, as investors looked ahead. The action was brutal when the rally stalled in 2017.
Here’s a four-year chart for West Texas intermediate crude oil (WTI) (EverFuture:CL1):
Here’s the action over the same period for the S&P 1500 Composite Oil and Gas Equipment and Services subsector:
You could have made a lot of money if you had precisely timed the swings of the commodity and the stocks, but that’s almost impossible, even for professional investors. During 2017, the price of WTI declined 10%, while the S&P 1500 Composite Oil and Gas Equipment and Services subsector dropped 17%.
Buying now requires conviction and the ability to stay committed for a period of years. Some traders believe that long-term oil demand forecasts are too low, while assumptions of U.S. shale-oil production are too high. Taken together, it’s possible that we are heading into a long ride toward sustained higher prices.
Why it may be different this time
A significant and steady increase in production can only mean good things for oilfield-services and equipment companies, and as the market always looks ahead, it’s best to anticipate any long-term rally in prices.
“The oilfield-services sector — after suffering the sharpest decline in history followed by the sharpest recovery — is back to what appears to be at least a three-plus year run of somewhat normal growth,” Wicklund wrote in his Jan. 3 report.
Credit Suisse expects oil exploration and production spending to increase by about 12% in 2018. Wicklund said “the industry sees a strong likelihood of several years of strong activity and reasonable growth,” with an estimated 13% rise in well completions in 2018, followed by increases of 9% in 2019 and 8% in 2020.
Wicklund expects the U.S. to see the fastest growth rate for oilfield services and equipment in 2018, with international and deepwater production expansion “not likely to take off until U.S. unconventional [fracking] has begun to reach diminishing returns on efficiencies and production growth.”
He also pointed to the industry‘s “dramatic efforts to reduce costs and improve operating efficiencies,” as helping to set up a multiyear recovery for the stock.
Here are the 10 stocks that Wicklund “would own into this recovery.” We have sorted them by market capitalization:
CompanyTickerMarket capitalization (millions of dollars)Closing price - Jan. 2Credit Suisse price targetImplied 12-month upside potentialHalliburton Co.(HAL)$43,287$49.61$55.0011%Weatherford International PLC(WFT)$3,434$3.46$5.5059%U.S. Silica Holdings Inc.(SLCA)$2,793$34.39$40.0016%C&J Energy Services Inc.(CJ)$2,319$33.84$40.0018%ProPetro Holding Corp.(PUMP)$1,687$20.31$20.00-2%Select Energy Services Inc Class A(WTTR)$1,080$18.24$20.0010%Hi-Crush Partners LP(HCLP)$992$10.90$15.0038%Mammoth Energy Services Inc.(TUSK)$907$20.38$22.008%NCS Multistage Holdings Inc.(NCSM)$696$15.86$23.0045%Solaris Oilfield Infrastructure Inc.Class A(SOI)$410$22.37$23.003%Sources: Credit Suisse, FactSet
Credit Suisse provides 12-month price targets, in line with the traditional practice of sell-side research shops. But Wicklund made clear that this is a multiyear play. That being said, considering the volatility of the space, you had better do your own research about any company you are considering, to form your own opinion about its long-term prospects.
Here are some of Wicklund’s comments about the oilfield-services companies he favors:
• Halliburton Co. (HAL) — “The company’s technology should allow for a higher margin than smaller-cap companies and therefore trade at a premium,” Wicklund said.
• He called Weatherford International Ltd. (WFT) “our higher-risk play, with too much debt, but a plan to reduce the debt over the next two years,” while making positive comments about the company’s reorganization and new management team.
• C&J Energy Services Inc. (CJ) completed its acquisition of O-Tex Holdings in November, which Wicklund called “very compelling.” He wrote that the stock is “still under some radar screens, which we view as a positive (potential energy).”
• ProPetro Holding Corp. (PUMP) is unique, according to Wicklund, in a space that “is very difficult to play regionally.” The company primarily operates in the Midland Basin, but the analyst expects its expansion in the Delaware Basin to eventually make it the second-largest player there.
• Select Energy Services Inc. (WTTR) acquired Rockwater Energy Solutions in November, giving the combined company “critical mass to participate in large water infrastructure projects, one of the hottest emerging trends we see in 2018,” Wicklund wrote.
• Wicklund called Mammoth Energy Services Inc. (TUSK) “a small-cap, integrated service company with very capable and creative management.”
• NCS Multistage Holdings Inc. (NCSM) provides specialized equipment for fracking. “We see more highly engineered solutions succeeded over brute force,” he wrote, while calling NCS’s technology “disruptive.”
• “No competitors are yet on the horizon” for the proppant silos being provided by Solaris Oilfield Infrastructure Inc. (SOI), Wicklund wrote.
Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.
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