Oilfield services stocks Helmerich & Payne (HP -1.3%), Nabors Industries (NBR -5.1%) and Oil States (OIS -1.1%) are downgraded at Wells Fargo, which believes rising U.S. production raises the odds of a “prolonged stagnation” in oil prices that will hurt energy firms’ spending outlooks over the next few years.
Wells lowers its outlook for international spending and margins and forecasts a growing disparity in the U.S. between rig count and stage count beginning in H217.
In addition to downgrading HP to Underperform from Market Perform with a $45 price target, cut from $62.50, and NBR and OIS to Market Perform from Outperform, the firm says it is shifting more North American-leveraged small- and mid-caps up its oilfield services rankings, such as RPC Corp. (RES -2.2%), U.S. Silica (SLCA -9.5%) and Select Energy Services (WTTR -1.8%).
Morgan Stanley lowers its outlook for the oil services industry to In-Line, citing increasing odds of a bear case scenario that sees 30%-50% downside to historical valuation support.
"It is now consensus that global oil markets will swing into surplus in 2018, and the burden of proof that this will not happen lies with the bulls," Stanley analyst Ole Slorer writes, as he expects the sector to be out of favor until more material bullish data points emerge.
The firm downgrades Helmerich & Payne (NYSE:HP), Oceaneering (NYSE:OII) and Frank's International (NYSE:FI) to Underweight from Equal Weight, and cuts Oil States (NYSE:OIS), Precision Drilling (NYSE:PDS), Nabors Industries (NYSE:NBR), Superior Energy (NYSE:SPN) and Independence Contract Drilling (NYSE:ICD) to Equal Weight from Overweight.
Trican Well Services (OTCPK:TOLWF) is upgraded to Overweight; rating on Tidewater (NYSE:TDW) and Hornbeck Offshore (NYSE:HOS) are removed due to restructuring concerns.
Transocean (RIG +1.2%) is upgraded to Equal Weight from Underweight with a $12 price target, up from $10, at Morgan Stanley, which says cost-control efforts continue to bear fruit, prompting positive EBITDA accretion of $600M in 2016 alone and an improved liquidity position as a result.
Oil States (OIS +0.2%) also earns a Stanley upgrade, to Overweight from Equal Weight with a $53 price target, up from $40, predicting a meaningful recovery in offshore production equipment orders over the coming quarters coinciding with improved onshore related earnings; thus the firm sees OIS reversing its underperformance relative to its North American pure play peers.
However, the firm also downgrades Atwood Oceanics (ATW -1.4%) to Equal Weight from Overweight on valuation.
"We see an obvious flaw in this analysis," says David Einhorn in his Q2 letter to Greenlight Capital investors. He's referring to Andrew Left's Citron's short of Chemours (CC +8.5%). Left contended Chemours could face $5B in liabilities thanks to 3.5K lawsuits from people living near its Teflon plant in Parkersburg, WV. Double-checking with Left, Einhorn found no math to justify that lofty figure.
Others have pegged the liability at just several hundred million dollars, not enough to topple the company.
Greenlight is an owner of 8.8M shares as of March 31.
In other Greenlight news, the hedge fund took advantage of the post-Brexit panic to cover shorts against Intuitive Surgical (ISRG +0.2%), Under Armour (UA -5.8%), and United Rentals (URI +2.3%).
Longs sold out of include: American Capital Agency (AGNC +0.4%), Baxter International (BAX +3.3%), Ingram Micro (IM -0.7%), and Oil States International (OIS +0.7%).
Greenlight fell 2.6% in Q2, bringing it nearly back to break-even for the year.