The all-time high oil prices backed by the current geopolitical scenario may make the oil sector look extremely lucrative from the outside, but on the inside, the companies are facing one of their toughest years, with solid pressure to increase production amid labor shortages, equipment supply constraints, and a cash crunch.
The Permian Basin, which is one of the world’s largest producers of oil, is seeing delayed rigging and production activities at its sites. The Energy Information Administration (EIA) expects U.S. drillers to increase domestic oil production by 8% compared to 2021, to roughly 12.6 million barrels per day.
The feat can only be achieved if the drillers get more equipment and labor to run their rigs. Oilfield service providers have gone through a sort of stagnant year in terms of equipment usage in 2021, and have spent heavily on maintaining their idled equipment.
As demand increased and the margins of these companies improved, most of them decided to increase shareholder returns in the form of higher dividends and share buybacks. The service providers are hesitant to invest more in newer equipment owing to the uncertainty related to the current Russia-Ukraine war.
Despite that, a combination of increased commodity prices, demand-induced activity growth, and the world’s transition toward renewable energy solutions is driving a major push for the energy services providers.
Let us look at two oil service companies gaining momentum amid the recent oil price surge, and what Evercore ISI analyst James West views are on the stocks.
Schlumberger NV (SLB)
Schlumberger is an oilfield services company providing technology 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 the 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 both earnings and revenue estimates. Moreover, the company introduced a 40% hike in quarterly dividends and boasts of a current dividend yield of 1.39%.
Schlumberger is focusing its efforts on zero-carbon solutions with the energy transition and net-zero-carbon goals being implemented by nations worldwide. 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’ Take on SLB
Recently, analyst West lifted the price target on the SLB stock to $51 (27.2% upside potential) from $48. while maintaining a Buy rating.
West is highly encouraged by SLB’s leadership position in the clean energy transition as it can innovate at scale compared to the newer entrants in space.
The analyst noted, “Schlumberger remains a top pick and is extremely well-positioned for the unfolding upcycle due to its heavy international and offshore exposure, capital disciplined approach, leading digital businesses, and leveraging the benefits of size, scale, and scope.”
Moreover, with 14 unanimous Buys, the SLB stock commands a Strong Buy consensus rating. The average Schlumberger price forecast of $50.73 implies 26.5% upside potential to current levels.
Halliburton Co. (HAL)
Halliburton is one of the largest providers of products and services to the energy sector related to the exploration, development, and production of oil and natural gas.
Halliburton reported stronger-than-expected first-quarter results, surpassing both revenue and earnings estimates. Halliburton pays a quarterly dividend of $0.12 per share and has a current dividend yield of 0.72%. The stock has gained a massive 53.6% year-to-date.
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 energy, and hydrogen storage.
Analysts’ Take on HAL
Recently, analyst West also revised the price target of the HAL stock upwards to $52 (51.6% upside potential) from $38, while reiterating a Buy rating.
West is highly motivated by Halliburton’s futuristic vision of oilfields which is based on “lower cost/higher-margin, less capital intensive, more internationally focused, and digital – with an enhanced return profile.”
Similar to SLB, West is extremely bullish about HAL’s position in the global upcycle trend for exploration and production (E&P) spending, which will result in higher top-line and earnings growth for the company, combined with outsized stock outperformance, the analyst noted.
Notably, HAL’s focus on short-cycle barrels in the current upcycle trend provides it with greater investment flexibility as operators can adapt faster to changing market conditions. Accordingly, HAL has increased its estimated spending for the NAM E&P by more than 35% for 2022.
The analyst believes that HAL’s portfolio of specialty chemicals, artificial lift, increased pressure pumping activity and drilling-related activities, and higher sales of testing and completion tools in North America and International markets bode well for the company’s future trajectory. Plus, its ESG-friendly equipment also benefits the company with its pricing power.
Overall, with 12 Buys and two Holds, the HAL stock commands a Strong Buy consensus rating. The average Halliburton price forecast of $46.61 implies 26.9% upside potential to current levels.
Moreover, the HAL stock scores a “Perfect 10” on the TipRanks Smart Score system implying that it is highly likely to outperform market expectations. Blogger sentiments are bullish on the stock, and corporate insiders have bought shares worth $2.6 million over the last quarter. Retail investors have increased exposure to the stock by 19.9% over the last thirty days.
Points to Ponder
Looking at the current events, the oilfield service providers have a power play at their hands and are poised for humongous growth if they apply their resources in an optimum way. With private players on board, the listed companies need to ensure that their resources are available when the stakes are high. All in all, it seems like a good time to capture the market.
Discover new investment ideas with data you can trust
Read full Disclaimer & Disclosure
