Oil Service Providers Gain Momentum Amid Rising Oil Demand
Unprecedented oil prices supported by the current geopolitical scenario may make the oil sector look hugely lucrative from the outside, but inside companies are facing one of their toughest years, with a strong pressure to increase production amid labor shortages, material supply constraints and cash shortages.
The Permian Basin, which is one of the largest oil producers in the world, is experiencing delays in rigging and production activities at its sites. The Energy Information Administration (EIA) expects US drillers to boost domestic oil production by 8% from 2021, to about 12.6 million barrels per day.
The feat can only be achieved if drillers get more equipment and manpower to operate their rigs. Oilfield Service Providers have gone through something of a flat year in terms of equipment utilization in 2021 and have been spending a lot of money to maintain their idle equipment.
As demand increased and margins for these companies improved, most of them moved to increase returns for shareholders in the form of higher dividends and share buybacks. Service providers are hesitant to invest more in newer equipment due to the uncertainty associated with the ongoing war between Russia and Ukraine.
Despite this, the combination of rising commodity prices, demand-driven business growth and the global shift to renewable energy solutions is providing a major boost to energy service providers.
Let’s take a look at two oil services companies that are gaining momentum amid the recent oil price spike, and what Evercore ISI analyst James West thinks of the stocks.
Schlumberger AG (SLB)
Schlumberger is an oil services company providing technologies for reservoir characterization, drilling, production and processing to the oil and gas industry. It is one of the largest offshore drilling companies in the world.
Amid rising fuel prices and increased demand for offshore drilling services, SLB stock has gained 26.8% year-to-date.
In its first quarter results, Schlumberger beat earnings and revenue estimates. Additionally, the company introduced a 40% hike in quarterly dividends and boasts a current dividend yield of 1.39%.
Schlumberger is focused on zero carbon solutions with the energy transition and net zero carbon goals being implemented by nations around the world. The company continues to invest in new energy technology ventures and innovative partnerships in strategic sectors. Some of its ambitious energy projects include carbon capture and sequestration (CCS), geothermal power plants, sustainable battery-grade lithium, and hydrogen.
Analysts’ views on SLB
Recently, analyst West raised the price target for SLB stock to $51 (27.2% upside potential) from $48. while maintaining a buy rating.
West is very encouraged by SLB’s leadership position in the clean energy transition, as it can innovate at scale against new entrants in the space.
The analyst noted: “Schlumberger remains a top pick and is extremely well positioned for the ongoing bull cycle due to its strong international and offshore exposure, disciplined approach to capital, leading digital businesses and harnessing the advantages of size, scale and scope.”
In addition, with 14 unanimous buys, SLB shares have a consensus strong buy rating. Schlumberger’s average price forecast of $50.73 implies upside potential of 26.5% from current levels.
Halliburton Co. (HAL)
Halliburton is a leading provider of products and services to the energy industry related to the exploration, development and production of oil and natural gas.
Halliburton reported stronger-than-expected first-quarter results, beating both revenue and profit estimates. Halliburton pays a quarterly dividend of $0.12 per share and has a current dividend yield of 0.72%. The stock has gained 53.6% since the start of the year.
Halliburton is also deeply involved in the energy transition paradigm. The company has projects that include carbon capture storage through artificial intelligence (AI) innovations, geothermal development programs, wind power and hydrogen storage.
The analysts’ view on HAL
Recently, analyst West also revised HAL’s stock price target higher to $52 (51.6% upside potential) from $38, while reiterating a buy note.
West is highly motivated by Halliburton’s futuristic oilfield vision, which is based on “lower cost/higher margin, less capital, more international and digital focus – with an improved return profile”.
Similar to SLB, West is extremely optimistic about HAL’s position in the global trend of higher exploration and production (E&P) spending, which will translate into higher revenue and profit growth for the company, combined with an outsized stock outperformance, the analyst noted.
Notably, HAL’s focus on short-cycle barrels in the current uptrend provides it with greater investment flexibility, as traders can adapt more quickly to changing market conditions. As a result, HAL has increased its estimated expenditure for NAM E&P by more than 35% for 2022.
The analyst believes that HAL’s specialty chemicals portfolio, artificial lift, increased pressure pumping and drilling-related activity, as well as increased sales of test tools and completions in North America and international markets bode well for the company’s future trajectory. Moreover, its ESG-friendly equipment also benefits the company through its pricing power.
Overall, with 12 buys and two holds, HAL stock gets a strong buy consensus rating. Halliburton’s average price forecast of $46.61 implies upside potential of 26.9% from current levels.
Additionally, HAL stock scores a “Perfect 10” on the TipRanks Smart Score system, implying that it is very likely to outperform market expectations. Blogger sentiment is bullish on the stock, and company insiders bought $2.6 million worth of stock in the last quarter. Retail investors have increased their exposure to the stock by 19.9% over the past thirty days.
Points to consider
Looking at current events, oilfield service providers have a power play on their hands and are poised for tremendous growth if they apply their resources optimally. With private players on board, listed companies must ensure their resources are available when the stakes are high. All in all, it seems like a good time to hit the market.
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