The price of oil has been moving upward. This can be played many ways, but with the increased interest in unconventional resource, it seems oil service stocks could benefit.
An increase in production will bring higher revenues and margins for the companies that service oil companies. Oil service stocks have outperformed the broader market over the past five years. This sector looks to continue this, and would be a good investment going forward. When looking at these stocks, some have had very high 5-year annualized EPS growth rates. The best performers are listed here.
Atwood Oceanics (ATW) operates offshore drilling rigs, such as jackups and semisubmersibles. This company looks inexpensive on valuation. Its annualized 5 year EPS growth rate is 56.83%. This company's PE ratio is 11.48. Analysts have estimated 2011 earnings growth to be 2.3%. Forward PE is 10.54 and 2012 estimated earnings growth is .5%. It is estimated that this company will average 10.7% growth per year for the next five years. Also, earnings estimates for 2012 have varied significantly. If the price of oil stays around or at $100/barrel it would not be surprising if day rates begin to increase. Atwood is down from a high of 46.54 and is now at $42.81. With analysts setting the bar relatively low for this company, it would not be surprising if it beats next year's earnings.
Core Laboratories (CLB) operates in reservoir description, production enhancement and reservoir management. Core's business has been good as the company had an average 5-year EPS growth rate of 39.62%. It seems this growth could continue when looking at the unconventional shales and the need to be very specific as to optimize the amount of commodity drawn out of the reservoir. This company's PE is 32.01. The 2011 estimated growth is 21.1%. The forward PE is 21.48. 2012 and estimated growth is 21.5%. This company has pulled back from a high of $99.46 to the current price of $94.11 per share. It is estimated that Core will grow 16% a year for the next five years. I would guess that oil will remain high, and that business will continue to strengthen along with backlogs. If this happens then we will see Core increase prices and profits. Core will also have plenty of work to do as there is plenty of inventory with in the United States.
FMC Technologies (FTI) is an oil service company that provides a wide range of oil and gas systems from well head to fluid control. This company's products are levered to the oil and gas industry. This company has a 5 year EPS growth rate of 35.81%. FMC has a PE of 28.82 and a forward PE of 21.18. The estimated earnings growth for 2011 is 15% and 2012 of 23.4%. As more wells are drilled in the United States and the difficulty of these services have increased, profits will grow. It is important to note that these parts can increase production, and/or decrease time which will increase margins. This company has had several upward EPS revisions.
National Oilwell Varco (NOV) is one of the premier oil service companies in the world. This company produces, makes and sells all types of oil and gas based systems. It also provides a wide range of services to the industry. NOV has seen a nice pullback in its stock, from $82.36 to $73.88. It has a PE of 18.7 and forward PE of 14.71. NOV's estimated earnings growth for 2011 is 1.5%, but has a much better estimate for 2012 at 21.9%. Over the next five years, analysts have estimated this company will grow 13.4% per year. NOV is a top notch company when it comes to oil services. It should be noted that this company is specifically levered to offshore drilling ships and other equipment used to drill in deeper water. If oil prices stay high, we could see a major increase to backlog. The company has beat earnings for four straight quarters and recently had estimates increased. This is a great long term buy and a well managed company.
Pride International (PDE) provides drilling services with respect to natural gas and oil. Five-year annualized growth of 29.03% has pushed this stock up with respect to market cap. The recent pullback has made this stock much more valuable especially when growth is added to the equation. Pride has a PE of 34, but the forward PE comes down to 12. Estimates have Pride growing 73.3% this year and 25% in 2012. These metrics make this stock cheap on valuation, and this company has made or beat the street in three of the last four quarters. In my opinion Pride is in a very good position. The increased demand for oil, and the increased price of this commodity, make offshore drilling very attractive for oil exploration companies even at higher day rates. When investing in offshore drillers the most important variables are the number of drillships and semisubmersibles. It seems many of the jackup rigs on the market have limited demand, but drillships that have the ability to drill in very deep water and deep into the ocean floor are still seeing demand. I would expect that demand will continue to increase for deeper drilling. If it does date rates will increase as utilization rates also increase.
Oceaneering International (QII) is a very interesting company. Its annualized 5 year growth is 25.58%. Oceaneering has a PE of 21.87. The forward PE is lower at 17.81. Estimates have negative growth of 1.4% this year and growth of 23.1% in 2012. Oceaneering has beat the street for four straight quarters. Oceaneering specializes in subsea engineering services for the oil and gas sector. This company has subsea vehicles that can be controlled remotely deep in the sea. This allows for work to be done on the ocean floor without endangering human life. This company also has other vessels used in inspection, repair and installation services. They also have divers to do inspection and repair of offshore oil rigs. There has been much said about this company after the BP oil spill. With regulations tightening, inspections are on an upswing.
Cameron International (CAM) is a well known oil service company. Its five year annualized EPS return is 25.58%. Cameron has done very well, better than names like Halliburton (HAL) and Schlumberger (SLB) in its sector. Cameron has a PE of 26.31 and a forward PE of 17.11. The 2011 estimated growth is 14.5% and the 2012 estimated growth rate is 26%. It should be noted that all the stocks in this group will do well. These companies have the ability to benefit from the current change to horizontal wells. As more wells are drilled they will also need service done on those wells and will require associated products sold by this company. I see all aspects of oil service to continue to do well for years to come. Upcoming growth rates in this sector are high with respect to its forward PE.
Dril-Quip Inc. (DRQ) has had an annualized five year EPS growth rate of 23.19%. Dril-Quip specializes in all sorts of drilling parts and equipment used in offshore oil and gas exploration and production. There products are specialized for all sorts of difficult drilling environments. It has a PE ratio of 28.71 and a forward PE of 19.52. Year 2011 growth estimates for Dril-Quip are 0% this year but next year jumps to 33.9%. It seems the growth estimate for this year is probably low. I believe that Dril-Quip has several upcoming catalysts for stock appreciation. The most significant is its specialty with respect to equipment used in harsh environments. Most of all the easy oil has been recovered, leaving areas that are not as easy to drill and produce. This company specializes in this type of completion. I am bullish about stocks that not only drill horizontal wells but also deep sea wells. The companies that have newer and better drilling and completion equipment will be better placed going forward into a time frame of difficult oil production.
Tidewater (TDW) has also done very well in the last five years. Its five year annualized EPS growth rate is 23.1%. It has a PE of 20.11 and a forward PE of 16.15. The estimated 2012 growth rate is 55%. Tidewater provides offshore service vessels and marine support services to the energy sector. I would be a little careful with this name as it has missed its last three quarterly earnings. This entire sector has been growing fast and I believe this sector will see growth for years to come.
Noble (NE) is a provider of offshore contract drilling services for oil and gas companies. As with Atwood, Noble has also done well over the past five years with an annualized EPS growth rate of 22.89. Noble is trading at a PE of 14.46 and a forward PE of 11.36. Although this year Noble has a negative growth year-over-year estimate, in 2012 this same growth rate turns positive to 69.2%. These stocks generally have traded at a discount to the broader market, but one thing to remember about offshore drilling is these companies generally sign long term contracts, and now that things are beginning to pick up in the oil industry, we could see strengthening day rates. An indicator for the these stocks beginning to grow is when contracts end, and what the new contract costs. Watch these names closely as we could be getting close to a time that utilization rates will begin growing and pricing increases with respect to day rates.
In summary, I like many of the names on this list. Technology is what will drive these stocks. Look for stocks with land rigs that have horizontal capabilities, and offshore rigs able to drill areas deep in the ocean and the ocean floor. These companies will do well into the future.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLB, BOLT, NOV over the next 72 hours.
Additional disclosure: The five year annualized EPS growth rate was obtained from Google Finance, all other valuation metrics came from Yahoo Finance.