By Mitchell Clark
If business conditions are good for a public company, then it's highly likely that its share price has already been doing well in this great monetary expansion. With the stock market at a high, it's tricky being a new buyer/speculator. As we've seen with biotechnology stocks, the price momentum can quite suddenly come to a halt.
One sector where there is more price momentum to be had is in oil. Not so much in the large, integrated oil companies, but in domestic mid-tier producers, as well as services.
In the large-cap space, Baker Hughes Incorporated (BHI) is now experiencing renewed momentum, both operationally and on the stock market. This oil and gas equipment and services company is seeing solid sales growth in North American operations, as well as the Middle East.
In spite of unusually cold weather accounting for a drop in North America's well count, the company was able to grow domestic first-quarter sales by 6.7% to $2.78 billion. Total sales for the first quarter grew 10% to $5.7 billion, while earnings grew 23% to $328 million.
Baker Hughes has been buying back a lot of its own shares (3.4 million in the first quarter), and the stock recently began a new uptrend. The company's two-year stock chart is featured below:
Chart courtesy of www.StockCharts.com
The largest oil and gas services company by revenue is Schlumberger Limited (NYSE:SLB). Its first-quarter sales grew to $11.2 billion, up from $10.6 billion comparatively.
Diluted earnings per share rose to $1.21 from $0.94 in the same quarter last year. The company bought back almost 10 million of its shares during the first quarter, spending approximately $900 million.
Schlumberger is expected to grow its revenues in the high single-digits this year and next. Earnings should improve some 20% this year compared to 2013, and the Street estimates another 15% in 2015.
So there's definitely operational momentum in oil and gas services; and according to the financial statements, margins are improving.
Share prices have already gone up, but this is a market that favors existing winners. With oil and gas prices holding firm, there's no reason why Schlumberger and Baker Hughes won't keep ticking higher throughout the year.
The one advantage that the big players have in oil and gas services is operational and geographical diversification. The well count is down in North America due to adverse weather conditions, but the effect is being mitigated by stronger activity in the Gulf of Mexico and the Middle East. New product and software technology is also padding sales and helping with margins.
Schlumberger's management expects oil prices to hold firm this year, with natural gas pulling back into consolidation. Spending growth rates on oil and gas services are expected to be evenly split between international and North American markets.
In January, Schlumberger announced a substantial 28% increase to its quarterly dividend. This is the third year in a row that the company has effected a double-digit dividend increase.
Looking at the numbers and company forecasts, there is operational momentum with oil and gas services. I suspect the price momentum will remain with this group of stocks near-term.