Analyst Actions: Credit Suisse On Oilfield Services; Initiates Coverage With Market Weight

By Staff,

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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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright (C) 2014 All rights reserved. Unauthorized reproduction is strictly prohibited.

This article appears in: Investing Commodities
Referenced Stocks: BHI , CAM , HAL , SLB , WFT

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