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3 Stocks to Buy as Oil Service Firms Regain Pricing Power

Nilanjan Choudhury

After enduring years of pricing concessions, oilfield service companies are beginning to see a recovery in their product and service rates, a new report from the independent energy research and business intelligence company Rystad Energy shows. In particular, continued consolidation in the space has raised hope for the providers of technical products and services to drillers of oil and gas wells.

Oil Slump Pressured Activity and Pricing, Drove Consolidation

Oil’s horror show saw black gold’s price come down from some $110 per barrel in mid-2014 to a 12-year low of $26.21 in early 2016. The commodity’s collapse threatened the industry's creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.

Oilfield services companies were some of the hardest hit by diving commodity prices as top energy companies resorted to spending cuts (particularly on the costly upstream projects) owing to lower profit margins. This, in turn, meant cancellation or contract renegotiation for equipment suppliers. Unprecedented declines in activity levels and a sharp fall in E&P capital expenditure led to lower revenues and pricing headwinds. In these trying circumstances, merger and acquisition deals helped service providers to cut their average costs and benefit from mutual technical expertise exchange.

Slew of Oilfield Service M&As

Schlumberger SLB – the largest company in the industry – acquired Cameron in 2015 to fortify its deepwater presence. A year later, Houston-based FMC Technologies, a major underwater energy equipment maker, merged with Paris-based Technip, an offshore oil and gas field developer, to form TechnipFMC plc FTI. Then, Baker Hughes combined with the oilfield unit of General Electric GE and finally, Schlumberger bought Weatherford’s fracking assets in 2018.

Signs of Rebound on Steadiness of Oil

Apart from a spate of M&As, increased efficiencies and cost-reducing technological advances have renewed interest in the oilfield service space, finally raising hopes for the industry’s recovery. As the industry becomes less fragmented, commodity prices steadily improve and drilling activities pick up, the market for services companies is on the mend. The lower competitive intensity also gives the sector components freedom to implement price increases. A combination of higher volume and pricing is expected to improve energy service companies’ margins.

The oilfield service companies are also well positioned to benefit from other favorable industry trends including rebound in the highly lucrative international markets, pick up in offshore activities and increasing complexity of the projects that require more technology.

3 Stocks to Invest In

Although consolidation on the seller side has resulted in operational synergies and scale benefits to the players, one should keep in mind that there are still certain segments in the industry that would continue to witness pricing pressures on oversupply concerns. Hence, a cautious strategy needs to be followed in order to select the best oilfield service stocks with potential for steady returns. To guide investors to the right picks, we highlight three stocks that carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Helix Energy Solutions Group, Inc. HLX: Helix Energy Solutions Group carries a Zacks Rank #1 and is a specialty services provider to offshore energy companies. The 2019 Zacks Consensus Estimate for this Houston, TX-based company is 28 cents, representing some 47.4% earnings per share growth over 2018. Next year’s average forecast is 38 cents pointing to another 36.9% growth. 

Oceaneering International, Inc. OII: One of the leading suppliers of offshore equipment and technology solutions to the energy industry, Oceaneering International has a Zacks Rank #2. Over 60 days, the Houston, TX-based company has seen the Zacks Consensus Estimate for 2019 increase 30.5%.

Subsea 7 S.A. SUBCY: A seabed-to-surface service contractor in the offshore energy industry, Subsea 7 also carries a Zacks Rank #2. Over 60 days, the Norwegian company has seen the Zacks Consensus Estimate for 2019 increase 28.6%.

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General Electric Company (GE) : Free Stock Analysis Report
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