BJ Services -- Another Gusher?

| About: BJ Services (BJS)

BJ Services Co. (NYSE:BJS) provides pressure pumping and other oilfield services to the petroleum industry worldwide. Fluctuating oil prices have led to a wild ride for stocks like BJS this year, but the latest direction is back up. Falling crude inventories in the U.S., production cuts by OPEC, and civil unrest in Nigerian oil fields combined to send oil prices sharply higher on Wednesday, giving a boost to BJS as well.

Higher oil prices over the past few years is driving strong demand for the oil/gas equipment and service industry. BJ Services is the fourth largest company in this industry with a market capitalization of nearly $10 billion and revenues of more than $4 billion. BJ's pressure pumping services consist of cementing and stimulation services used in the completion of new oil and natural gas wells and in remedial work on existing wells, both onshore and offshore. Stimulation services comprise fracturing, acidizing, sand control, nitrogen, coiled tubing, and service tools. The company's other oilfield services include completion tools, completion fluids, casing and tubular services, and production chemical services, as well as precommissioning, maintenance, and turnaround services in the pipeline and process business, including pipeline inspection.

For fiscal year 2006 which ended in September, BJ is expected to report earnings of $2.52 per share which would represent an 85% increase from $1.36 in FY2005. The consensus is for EPS of $3.08 in FY2007. Revenues are seen at $4.35 billion in the year just ended and topping $5.1 billion in FY2007. There's been concern among investors that lower oil prices might lead to a cutback in North American oil drilling, but earlier this week Halliburton (NYSE:HAL) issued bullish comments on the industry and indicated plans to ramp up its capital spending in the year ahead.

Those comments and the bounce in oil prices has given new life to stocks like BJ Services. BJS dropped from a January peak of $42.85 to less than $28 earlier this month, but now it's bounced back above $32 currently. Whether this is just a short-covering bounce or renewed enthusiasm for the sector remains to be seen. It all comes down to the direction of oil prices and what investors expect for the drilling services industry ahead.

For now, the profit picture at BJ Services certainly looks healthy thanks to the old standby of more demand than supply for oil and natural gas. Petroleum industry drilling and exploration has been on the rise for the several years yet output has not increased much. All the while, demand is soaring thanks to a solid U.S. economy and the explosive Chinese expansion, among other factors.

Analysts are forecasting an earnings growth rate of 20% over the next five years, so there's plenty of growth ahead for this company. While the stock had a pretty good run in recent years, it is now only trading at 10.5 times earnings estimates for the year ahead, a substantial discount to the growth rate.

As long as oil prices stay high, oil companies will continue spending on drilling and exploration, not to mention efforts to keep existing wells on line and producing at maximum output. That's music to the ears of BJ Services.

Disclosure: Author has no position in BJS