Historically, January has been a seasonal time of weakness for the oil and gas services sector. This year has proven to be no different as there have been concerns about the North American onshore market being over supplied, seasonal closures due to bad weather and volatility in oil prices. For the investor looking to enter the oil and gas services market Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL) are three large cap companies that have recently had a pullback in share price and are looking to outpace the market in 2014.
Schlumberger NV is a supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide.
- Currently, Schlumberger is trading at 18.52x earnings. This is 13.01% less than 5 year average of 20.93x earnings.
- Analysts at MSN are expecting Schlumberger to lead the industry with a five year growth rate of 15.90% compared to the industry average of 14.50%.
- Bloomberg is expecting a significant increase in earnings over the next couple of years. The average estimate from 22 analysts is revenue to hit $54.6 billion in 2015. This represents an increase of 26.96% over the next 2 years.
- This growth rate expectation leads to a PEG ratio of 1.00 according to finviz.
- The company currently has a yield of 1.80%.
As stated in my article Schlumberger: A Great Time To Buy, I have a price target for Schlumberger at ~$105.00 this spring as seasonal demand begins to pick-up.
Baker Hughes Inc., operates in the oilfield services industry. It provides products and services for drilling and evaluation of oil and gas wells; completion and production of oil and gas wells; fluids and chemicals and reservoir technology.
- Of the three stocks Baker Hughes is currently the most expensive compared to historical ratios. Currently, the stock is trading at 13.08x forward earnings and 22.65x current earnings. This indicates that Baker Hughes is 6.14% overvalued compared to their 5 year average of 21.34x earnings.
- Analysts at MSN are expecting Baker Hughes to outpace the industry with a five year growth rate of 15.80% compared to the industry average of 14.50%.
- Bloomberg is expecting a significant increase in earnings over the next couple of years. The average estimate from 14 analysts is revenue to hit $24.1 billion in 2015. This represents an increase of 15.31% over the next 2 years.
- The company currently has a yield of 1.10%
As stated in my article Baker Hughes: An Excellent Buying Opportunity, the company's leading technological advancements in IN-Tallic disintegrating frac balls deliver significant time and cost savings for operators, thus creating more business for the company.
Founded in 1919, Halliburton is one of the world's largest providers of products and services to the energy industry. With more than 75,000 employees, representing 140 nationalities in approximately 80 countries, the company serves the upstream oil and gas industry throughout the lifecycle of the reservoir - from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
- Currently, the stock is trading at 12.14x forward earnings and 24.12x current earnings.
- Analysts at MSN are expecting Halliburton to outpace the industry with a five year growth rate of 17.80% compared to the industry average of 14.50%.
- Bloomberg is expecting a significant increase in earnings over the next couple of years. The average estimate from 23 analysts is revenue to hit $32.3 billion in 2015. This represents an increase of 13.33% over the next 2 years.
- The company currently has a yield of 1.20%
As stated in my article Halliburton: A Great Time To Step In, I have a price target at $62.88 for 2014 representing 26.32% upside.
Positive Results and Diversification
Recently Schlumberger Ltd, reported a better-than-expected profits due to their revenue derived outside North America. Schlumberger receives ~70% of its revenue from outside North America, so if you are looking for to invest in the most globally diversified of the three stocks listed Schlumberger is the one for you. The company's earnings were lead due to robust drilling activity in Saudi Arabia and the United Arab Emirates.
Baker Hughes reported its revenue from the Middle East and Asia Pacific jumped 27% despite a temporary shutdown of operations in southern Iraq. As Baker Hughes receives just over 50% of its revenue from outside North America, they are globally diversified, but are more prone to volatility in the North American drilling market.
Halliburton, who also reported better-than-expected profits said on Tuesday, stated its revenue from the Middle East and Asia climbed 13% in the fourth quarter. In 2013, Halliburton earned ~48% of its revenue outside North America, so if you are looking for a service company that derives most of their revenue within N.A., this is an excellent company to invest in.
Demand in the Middle East & Asia including Saudi Arabia, United Arab Emirates as well as in exploration activity in Malaysia and Australia were key drivers for the oil and gas service stocks.
In North America, deep-water activity in the Gulf of Mexico continued to be lead the way, while onshore drilling results were weaker due to further pricing weakness.
Looking into 2014 Deep-water demands will help drive profits for Schlumberger, Baker Hughes and Halliburton. As more advanced technologies have created opportunities, that in turn has reduced costs and increased safety, it has become economical for companies to pursue deep-water reserves. Major E&P companies such as Exxon (NYSE:XOM), Chevron (NYSE:CVX), BP p.l.c. (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) have increased their presence in deep-water regions. Exxon is expecting deep-water projects to account for 8% of its new source production over the next decade. Chevron is expecting deep-water projects to account for 40% of its new source production. BP p.l.c. is banking on the most as it is expecting 52% of its new source production to be from deep-water reserves over the next 10 years. Shell is more reserved in that it expects 25% of new source production to come from deep-water projects. To support their deep-water growth, these major E&P companies, along with others, have significantly increased their deep-water Capex spending outlook over the next four years.
All the companies listed above are currently trading at fair valuations compared to their historical metrics. As stated above, earnings outside North America are currently driving these stocks. As there are many concerns about the North American onshore market being over supplied, seasonal closures due to bad weather and volatility in oil prices, Schlumberger, Halliburton and Baker Hughes stock prices have declined. As each of these companies listed above has significant growth potential due to their technological advancements, I believe the current drop in price has created a buying opportunity.
Disclosure: I am long HAL, SLB, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.