Wait 'til You See the Whites of their Eyes; INITIATING Coverage
with a MARKET WEIGHT stance.
Our View: Oilfield service stocks generally trade sideways for
the balance of the year, typically against a rising rig count. Not
only is the rig count dropping but it is likely to continue
dropping for at least the next four to six months. Pricing, which
many thought had bottomed, has taken another step down, the extent
of which was only known to management after they closed the books
for the quarter. This sets up earnings disappointment and we think
earnings and expectations get reset. Other than the relative safety
of the equipment sector, we see no reason to chase the stocks into
year-end.
Differentiation: We are clearly positive on the longer-term,
almost "secular," growth potential of domestic drilling. While
well-to-well consistency has still eluded the industry, the ability
to produce shale/tight sands is still under-appreciated. But the
capex requirements for the service industry have been huge and the
industry is significantly under-capitalized for the international
shale boom. That continuing high capital outlay is at the expense
of returns and any DCF-based valuation having a significant impact
on valuation and sector multiple differentiation. Something has to
give, and it is never pretty.
Stock Calls: North American (NAM) services are seeing falling
volume and price-never a good combination. Halliburton Company (
HAL
) and Baker Hughes Incorporated (
BHI
) are most effected, Schlumberger Limited (
SLB
) next, followed by Weatherford International Ltd (
WFT
), under our coverage. Although a bit crowded and already popular,
the equipment companies should continue to outperform, especially
through year-end. We are initiating on Cameron International
Corporation (
CAM
) and HAL at Outperform and on BHI, FMC Technologies, Inc (FTI),
SLB, and WFT at Neutral. When the market can better discount the
price dynamics and the activity dynamics, we believe investors will
come back to the stocks. For now, we are neutral on the sector
through year-end.