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Philip van Doorn

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May 31, 2019, 8:58 a.m. EDT

Investors’ patience with oil-services stocks could be richly rewarded

A long-term investment could lead to gains of at least 100%, according to one money manager

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By Philip van Doorn, MarketWatch


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Transocean is among oil-services companies whose share have been hit especially hard over the past year.

Oil-stock investors sure are jittery these days, and they have been particularly brutal to oil-services companies over the past year.

That group of stocks has fallen far more than the price of oil has, setting up what appears to be an opportunity for investors who can look beyond the next few months and stay committed for several years.

Charles Lemonides, chief investment officer of ValueWorks, which manages about $220 million for private and institutional clients in New York, named two oil-services companies he has invested in for the long term. Those and related exchange traded funds are listed below.

Long-term potential

A list of S&P 500 companies that had fallen at least 50% from 52-week highs included two oil-field-services companies: Halliburton /zigman2/quotes/210488727/composite HAL -0.43%  and National Oilwell Varco /zigman2/quotes/208758290/composite NOV -2.09% .

Here are total returns (and the price change for crude oil) for five oil-related energy subsectors for one year through May 28:

S&P 500 energy subsector Total return - 12 months
Integrated Oil -5.1%
Oil and Gas Exploration and Production -18.1%
Oil and Gas Drilling -22.4%
Oil and Gas Refining and Marketing -32.2%
Oil and Gas Equipment and Services -44.7%
West Texas Crude - continuous quote -12.9%
Source: FactSet

Phil Flynn, a senior market analyst at Price Futures Group who writes a daily energy report , said in an interview May 28 that oil-services companies have suffered “partly because their customers cannot afford to pay them.” Cuts in capital spending by oil-exploration-and-production companies have hurt services companies’ profitability.

Flynn said that when the price of oil was rising in late 2017 and early 2018, oil-services companies were “ramping up,” but then “got caught leaning the wrong way” as a reversal in price action led to a significant decline in the U.S. shale rig count.

Meanwhile, services companies that need to expand their labor forces face a seller’s market, which means more pressure on profits.

With a lot of oil producers “in debt up to their eyeballs,” Flynn doesn’t expect a quick turnaround for the services companies. Yes, the U.S. oil industry is expected to set a production record this year, but spending on exploration and production is set to decline significantly .

So the short-term problem for oil-services companies is clear. But “you will not continue to see increases in production without drilling,” Flynn said.

“We know the cycle will change, especially with growth of demand, which people are underestimating. A couple of years from now, producers may have difficulty meeting demand, and then the services companies will be in the drivers seat,” he added.

So there’s the long-term case for beaten-down oil-services stocks, with an emphasis on “long term.” It’s easy to say that you shouldn’t be buying stocks unless you can commit for three to five years. That flies in the face of sell-side analysts’ one-year price targets. But for oil-services companies, it might be more reasonable to make a firm five-year commitment before jumping in. Otherwise you could easily get burned. Badly.

/zigman2/quotes/210488727/composite
US : U.S.: NYSE
$ 18.43
-0.08 -0.43%
Volume: 26.69M
Oct. 18, 2019 6:30p
P/E Ratio
12.12
Dividend Yield
3.91%
Market Cap
$16.14 billion
Rev. per Employee
$399,917
loading...
/zigman2/quotes/208758290/composite
US : U.S.: NYSE
$ 20.11
-0.43 -2.09%
Volume: 4.31M
Oct. 18, 2019 6:30p
P/E Ratio
N/A
Dividend Yield
0.99%
Market Cap
$7.76 billion
Rev. per Employee
$241,137
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