Thursday, July 5, 2012

Frackers: Sterne, Agee & Leach on the Oilfield Service Stocks (SLB; CAM; OIS; HAL)

Something to remember: All of the natural gas wells that were fracked over the last couple years will have to be re-fracked as the production rates decline, some wells will get fracked three or four times over their expected lives. It's like an annuity for the service companies, something I've not heard any analysts talk about.
From Barron's Investors' Soapbox PM (July 3):

Favorites in Oil-Service Stocks
Sterne Agee likes Schlumberger, Cameron and Oil States International.
We believe the underperformance in the oil-service sector has been related to weak oil prices, a greater-than-expected drop in U.S. natural-gas drilling and downward earnings-per-share estimate revisions.
We are cutting estimates and adjusting price targets for Baker Hughes (ticker: BHI), Halliburton (HAL), Schlumberger (SLB), Superior Energy Services (SPN) and Weatherford International (WFT). Our favorite names include Schlumberger, Cameron International (CAM) and Oil States International (OIS).

We are reducing estimates on several names on our universe owing mainly to a more cautious approach to North American margins over the next several quarters. We are trimming our U.S. rig count forecast for 2012 by 100 rigs to 1,950, but believe activity holds up well as customers' hedged positions coupled with leasehold drilling in liquid-rich areas create an activity buffer....MORE
S, A&L price targets: SLB-$89; HAL-$46; BHI-$47

Back in June Investors' Soapbox AM had Barclays' thoughts:
4 Cheap Oil Service Stocks 
Barclays says these names – all down this year -- offer deep value.
Given the current macroeconomic uncertainty (coupled with falling oil prices), recent price declines in the North American pressure pumping market, and even potential shortages of guar, investors have had many reasons to avoid the "Big Four" oil service companies of late.

However, we think consensus earnings revisions have largely bottomed and, as a number of near-term transitory issues begin to show signs of resolution, we think investors (particularly deep value-minded ones) are revisiting the group given the low historical valuations.

The Big Four oil service providers  -- Baker Hughes International (ticker: BHI), Schlumberger (SLB), Halliburton (HAL) and Weatherford International (WFT) -- are trading at a 26% discount to their three-year average on a price-to-tangible book value basis, their lowest level in two years.

On a five-year basis, the group is trading at a 38% discount to historical levels. While much of the oil services, equipment and drilling sector is trading at a modest discount to its historical averages, the large-cap diversifieds appear to be experiencing the largest disconnect.

As the European crisis unfolded in 2011, the shares of the Big Four began decoupling from oil prices and traded instead with the broader market.

When those fears abated around year end, oil service stocks rallied and began to close the gap. As Euro concerns and "risk off" trades have returned of late, both oil service and energy as a whole have unperformed the broader market year-to-date.

A recoupling at current levels would imply a nearly 50% rise even after the recent correction in oil prices. As earnings revisions find a bottom and investors return to the relatively strong oil service fundamentals, we expect this multiple to expand back toward historical levels.

At roughly 1.9 times price-to-tangible book value, Weatherford is currently the cheapest, while Baker Hughes and Halliburton trade around two times and 2.25 times, respectively. Schlumberger currently commands a healthy premium multiple of about 6.2 times tangible book value....MORE