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Oil Services And Equipment ETFs Pump Out New Highs
By: Investor's Business Daily
Oil and gas services and equipment ETFs pumped out fresh 52-week highs Thursday following a positive industry report fromGoldman Sachs ( GS ) and a Transocean ( RIG ) guilty plea and agreement to pay criminal fine for its role inBP 's ( BP ) 2010 Gulf of Mexico oil spill.
PowerShares Dynamic Oil & Gas Services ( PXJ ),Market Vectors Oil Services ( OIH ) andiShares Dow Jones U.S. Oil Equipment Index (IEZ) all popped 3%, breaking out of bases or extending gains to new highs.
"Following four quarters of sequential declines in North American drilling activity and oil service profitability, January is marking a turnaround in activity," Goldman's equity analysts wrote in a report. "Revenues/margins for North American service companies either bottomed in fourth-quarter 2012 or are expected to bottom in first-quarter 2013, marking a major inflection for the group."
Nabors Industries (NBR)jumped 4.4% in double average volume after Goldman upgraded the shale exploration services provider to buy and added it to the conviction buy list, noting that it trades at a 34% discount to its net asset value.
Goldman reiterated its buy rating onHalliburton (HAL), which rose 6% Thursday,Basic Energy Services (BAS), up 8%;Schlumberger (SLB), up 4%; Cameron International (CAM), up 2%;National Oilwell Varco (NOV), up 2%;Pioneer Energy Services (PES), up 9%; andC&J Energy Services (CJES), up 6%.
Share prices should get a boost from robust free cash flows at several companies, raising the potential for dividend increases and share buybacks, along with the likelihood of margin expansion, asset restructuring, the possibility of leveraged buyouts and rising horizontal rig counts, Goldman wrote.
"There is strong evidence from past cycles that increases in rig count causes improvement in valuations during this part of the cycle," Goldman analysts wrote. "While continuing declines in vertical rig count are masking this growth, North American service profitability is driven by horizontal rig count rather than the vertical rig count."
The U.S. horizontal rig count now is 3% higher than the average in the fourth quarter. Goldman projects U.S. rig counts to rise by 150 rigs, or 9%, by year's end.
"Moreover, well count is the true driver of service profitability and that is increasing at an even higher rate, owing to rising rig efficiency," Goldman added.
Based on research going back 20 years, stocks bottomed long before rig counts bottomed. Goldman believes large-cap energy services and equipment providers bottomed in June 2012 and that rig counts bottomed in January.
"However, the large caps are currently up only 4% since that early-January rig count trough, implying significant upside still exists should historical trends play out," Goldman wrote.
Transocean surged 4% to 59.30, a 52-week high, in heavy volume. It broke out of a bullish cup-with-handle chart pattern. A federal judge approved the Switzerland-based firm's deal with prosecutors to plead guilty to a misdemeanor charge and pay a $400 million criminal penalty in the BP oil disaster that killed 11 workers.
It also agreed to pay $1 billion in civil penalties, most of which will fund oil spill prevention research and environmental restoration. It will also be on probation five years.