Six oil companies poised to prosper as the energy business rebounds
by Claire Poole
Investing in the energy sector right now is a little like catching a falling knife. Oil prices have been volatile after their dramatic dive last year halved their value. They recovered a bit in February to more than $55 per barrel only to slide again last week to the mid-$40 level, where they're hovering today.
Given where oil prices are and how they keep moving, it's especially difficult to put your money into oilfield services. Companies in this area are feeling the most pain, with oil and gas explorers demanding -- and often getting -- big price reductions from their vendors to keep them on and showing them the door when they try to talk about new business. A lot of oil services companies have announced layoffs, including 30,000 from Schlumberger Ltd. (SLB), Weatherford International plc (WFT), Baker Hughes Inc. (BHI) and Halliburton Co. (HAL) combined, and many are reluctant to give any guidance to analysts as to how their earnings will look in the future.
So it was probably with some trepidation that Global Hunter Securities Inc.'s oilfield services team -- led by Ken Sill and Mark Brown -- released its list of top stock picks in the oilfield services industry late last week. It came with a warning: That only investors with a six-month horizon should start adding to their positions, and only on the next correction in the shares of oilfield services providers, which the firm thinks may already be underway.
Who is on the list? It's a mix of offense and defense, Global Hunter said. It's also short, with only six companies making the cut. They include Superior Energy Services Inc. (SPN), C&J Energy Services Inc. (CJES), Oceaneering International Inc. (OII), Hornbeck Offshore Services Inc. (HOS), Patterson-UTI Energy Inc. (PTEN) and Cameron International Corp. (CAM).
Global Hunter said Superior, which is led by CEO Dave Dunlap, has three things going for it: The possibility that it can pick up forced divestitures from the Schlumberger-Baker Hughes tie-up with its $400 million in cash and strong balance sheet giving it good leverage; its targeted growth strategy focused on large international markets with high levels of activity and good prospects, including Argentina, Brazil, India and Saudi Arabia; and its strong exposure to North American completion and production services, which are faring better than most and will be a growth story in the next decade, in the firm's view.
C&J, headed by long-haired founder Josh Comstock, will also benefit from dealmaking, given its combination with Nabors Industries' pressure pumping assets (which closed this week) that triples its size and will lead to $50 million to $100 million per year in cost synergies; and its focus on North American completions work and its entry into Saudi Arabia, which the firm thinks will be the strongest drilling markets in coming years. Global Hunter also noted the company's superior margins that are selectively vertically integrated, which allow it to remain cash flow positive when peers are bleeding cash (it makes its own its own pressure pumping equipment, mud motors and perforating guns, for example).
Oceaneering, led by 35-year company veteran Kevin McEvoy, is a defensive pick, as its remotely operated vehicle business (27% of sales) shouldn't suffer the steep decline in sales that will affect most other oilfield services businesses but will experience more of a "moderation in growth," the firm said. Hornbeck, which is involved in the offshore supply vessel market, "has enough fuel for the long haul," the firm said, taking aggressive actions to lower its cost base by stacking 12 vessels and having only 20% left of its $1.2 billion vessel construction capital expenditure program. Its financial position is also sound, having reworked its undrawn revolver, which was extended until 2020 and had its leverage covenant removed (it doesn't have any funded debt maturing until 2019). Global Hunter is projecting $113 million in free cash flow for Hornbeck next year and believes it will be comfortably able to buy back shares to defend its valuation if the market remains depressed in 2016.
Global Hunter identifies Patterson-UTI, led by CEO Andy Hendricks, as the Rodney Dangerfield of the group, with the quality of its operations and assets in land drilling and pressure pumping "underappreciated." Its land rig business doesn't have any exposure to speculative new builds, as the company is scaling back its rig construction plans this year, and roughly a third of its Ebitda is generated by pressure pumping, which is well positioned as attrition eats up the marketed supply base of equipment during the downturn, the firm said.
Finally, there's Cameron, headed by longtime CEO Jack Moore. While its stock has been beaten down with operators "recalibrating" spending, Global Hunter expects its OneSubsea joint venture with Schlumberger to land a handful of major project awards this year. It noted that the company continues to ship blow out preventers (which it unfortunately provided to the doomed Macondo project), and has aftermarket service agreements in place for newer stacks (some jackup rig package orders may find their way into Cameron's books as well, it said). And while exposure to Petrobras in the backlog is a risk facing nearly every global oilfield service company, subsea "trees," or well monitors, that Cameron put in place for the Brazilian oil giant a couple of years ago are still "humming along" and the seven blow out preventers in backlog for Brazil are tied to Aker Solutions rather than to Petrobras or Sete Brasil Participacoes SA, which leases rigs to Petrobras, the firm said. And, like Oceaneering, Cameron looks like it's able to repurchase shares out of excess cash, having spent $1.7 billion doing so last year (Global Hunter is expecting another $1.2 billion this year).
So who fell off the firm's list? Natural Gas Services Group Inc. (NGS), whose plans to reduce spending will cut its fleet growth rate in half; FMC Technologies Inc. (FTI), whose margins will shrink near-term and its subsea orders will fall off going forward (although it announced a joint venture this week with Technip SA that may help); Pacific Drilling SA (PACD), which will have contracting challenges for existing and new rigs being delivered; Schlumberger, which, despite its sterling reputation, is suffering capex cuts and a drop-off in business like the rest of the industry; and Weatherford, whose debt was downgraded by Moody's Investors Service on Tuesday on the risk of increasing debt balances and doubts as to whether it can generate positive free cash flow through the downturn.
Global Hunter said this cycle in the oil and gas industry is falling harder and faster than the 2008-2009 downturn, particularly in terms of pricing, and "no one knows how bad it will get." But the firm expects oil prices and upstream spending to rebound sometime next year. It couldn't come soon enough for some of these names.
