Following a plethora of jumps and drops, the price of crude oil rose an impressive 45% last year. This helped ‘Energy’ to be crowned as the top performing S&P sector in 2016 with a market-thumping 24% return.
By February, prices plunged all the way to a low of $26 per barrel, thanks to the boom in shale oil production and rising output from OPEC. The dramatic slide prompted several analysts to make bold calls on a potential bottom. While some suggested prices might drop as low as $20 a barrel, gloomier estimates called for a sensational $10-per-barrel floor.
But thankfully, none of these bone-chilling forecasts were correct.
A historic OPEC production cut agreement, together with help from non-OPEC producers and slashing investments (in existing and new wells) have seen oil prices more than double from their last February lows to $54.
A Better Climate for Oil Producers
While all crude-focused stocks stand to gain from rising commodity prices, companies in the exploration and production (E&P) sector are the best placed, as they can extract more value for their products. Consequently, with oil prices recently jumping to their highest levels in 18 months, upstream firms are hoping for an untick in their their revenues, earnings and cash flows.
Good News for Oilfield Service Players
While the oil price rebound is good news for E&P stocks, it also translates into a better market for oilfield service providers. This industry includes providers of technical products and services – from locating hydrocarbons to optimizing production through the life of the field – to companies drilling oil and gas wells.
If the producer selects the area to drill for oil and arrange finances for the operation, it’s the service providers who supply the tools, equipments and the manpower to make the exploration and then production possible.
Among such companies, Halliburton Co. HAL and Schlumberger Ltd. SLB warrant particular mention. With their massive market capitalizations of $50 billion and $120 billion, respectively – they dominate and define the Oil and Gas – Field Services industry, which is ranked 77 out of the 265 industries in our coverage (top 29%). The broader ‘Oil and Energy’ sector of which they are a part, is also positively placed at number 2 out of a total 16 sectors we cover (top 13%).
Houston, TX-based Halliburton is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance, and engineering and construction services to the energy, industrial, and government sectors. The company operates under two main segments: Completion and Production, and Drilling and Evaluation.
We appreciate Halliburton’s cost-cutting initiatives (like reduced headcount, consolidating facilities) in the midst of weak oil prices over a length of time. As of the end of third quarter, the company has successfully implemented on its plan of pruning annual costs by $1 billion, which Halliburton initially expected to achieve only by the end of 2016. In fact, Halliburton has used the challenges prevailing in the industry to its advantage, mainly by offering low cost solutions that aids producers in churning out more by investing less.
Halliburton’s stock performance has been pretty exciting lately. Shares are at fresh highs these days, and the stock has recovered nicely from its rough start to 2016 when oil prices fell to a 12-year low. In fact, Halliburton has run up 20% in the past 3 months thanks to a surprise third-quarter earnings, coupled with commitments by OPEC and non-OPEC players to slash production targets. The price movement compares favorably with the industry, which has advanced just 8% over the same period.
The oilfield services company also has an incredible history when it comes to beating earnings estimates. Investors should note that Halliburton hasn’t missed earnings estimates since mid-2014.
Moreover, the Zacks Rank #2 (Buy) company’s expected EPS growth rate for 3 to 5 years currently stands at 14.10% –– comparing favorably with the industry growth rate of just 9.80%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Finally, with an Earnings ESP of +200.00% and Zacks Rank #2, our proven model shows that an earnings beat is likely for Halliburton for the upcoming fourth-quarter 2016.
Schlumberger is the world’s biggest oilfield services company, providing technology, project management, and information services to the global oil and gas industry. Schlumberger’s reporting segments can be categorized under four units: Reservoir Characterization, Drilling, Production and Cameron.
The oil equipment bellwether’s stock price struggle throughout 2016, as it failed to meet earnings expectations in 2016 first quarter for the first time since 2011. Though it quickly recovered, posting above expectations the following two quarters, the stock has been pretty subdued. Schlumberger share price is up a modest 5% in the last 3 months compared to 8% for the industry. Also, unlike Halliburton, Its expected average growth of 9.80% in the next five years is just about par for the industry.
Last year’s combination with Cameron, though is a big positive for the company. The merger has created technology-driven growth by integrating Schlumberger’s reservoir and well-technologies with Cameron wellhead and surface equipment, flow control and processing technology. The merged entity of the two complementary technology portfolios provides the industry’s most comprehensive range of products and services, from exploration to production and integrated pore-to-pipeline solutions that optimize hydrocarbon recovery to deliver reservoir performance.
Worryingly, an earnings beat is uncertain for Schlumberger in the to-be-reported quarter. For the 3 months ended December 31, 2016, the company has an Earnings ESP of -7.41%, while it carries a Zacks Rank #3. While a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.
While both stocks are part of a rebounding industry, it’s clear that Halliburton has a better surprise history, which means it is more predictable. It is also a better buy because its poised to beat fourth quarter earnings. Even the stock price and Zacks Rank favor Halliburton.
Apart from Halliburton, investors interested in the oilfield services space may also consider Baker Hughes Inc. BHI and Basic Energy Services Inc. BAS, both of which carry the same Zacks Rank as Halliburton.
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