Oilfield Services : 2 Stocks to Buy, 1 to Avoid

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Due to low natural gas prices, companies in North America are temporarily shutting down their natural gas rigs, which is why the number of operational rigs has dipped below its 13 year low. Oil and gas prices have risen significantly from their lows, and E&P activities are increasing in Europe, Africa, and Asia. This presents growth opportunities for oil and gas E&P players, but not all companies have a bright future.

National Oilwell (NYSE: NOV) has carried out 2 major acquisitions this year, costing the company $3.456 billion. Due to these acquisitions, NOV reported negative free cash flows, which has worried the investors. However, I believe the pessimism surrounding the stock is overdone, as the company reported stellar financials.

On a quarterly basis, its revenues rose by 42% and its diluted EPS rose by 14.4% year over year. Its debt/cash equates to 0.88x and its debt/equity stands at a meagre 8%. Both these metrics indicate that the company is not cash strapped. Also, shares of NOV trade at a forward P/E of 10.27x with a PEG of 0.83x, which indicate that the stock is undervalued.

The earnings missed the Street’s estimates and since then, its shares have plummeted by nearly 15%. I believe that the crash happened due to overly optimistic estimates. Also, one should note that despite the acquisitions, the company wasn’t burdened with debt. It’s cash flows took a hit, and I expect positive FCF in the coming quarters, as the acquisition-related capital expenditures drop. In my opinion, investors should look to enter the stock, while it's still available at low valuations.

Cameron International (NYSE: CAM) is expected to benefit from the increasing oil and gas E&P activities in the Middle East. The company recently entered into a $100 million contract with BP, under which the former would be providing its maintenance services and equipment at Rumaila field. Cameron also entered in a JV with Schlumberger to explore sub-sea drilling opportunities. Under the deal, Cameron International receives $600 million in cash with a 60% stake in the JV.

Analysts estimate that 200 new wells would be drilled in the next 4 years, and Cameron International would be one of the solid players to take advantage of the growth potential. The company reported record sales of $2 billion, netting $175 million in profits. That equates to a healthy net profit margin of 11.42%.

Its shares carry a forward P/E of 13.52x with a PEG of 1.03x, indicating that the stock is undervalued by a fraction. In 2013, analysts expect the EPS growth to be 29%, and altogether Cameron International makes a lucrative investment option.

However, Baker Hughes (NYSE: BHI) has been sliding. Compared to its larger peers, Baker Hughers has a larger dependence on the North American region. Due to low natural gas prices, oil and gas E&P activities have reduced in the region.

The company reported an EPS of $0.73, which missed the Street’s estimates of $0.85. Revenues also increased fractionally by 3.2%. Also due to the lack of any major expansions or acquisitions, the company doesn’t have much to offer. North American rigs are already down by 17% and are only expected to decline further in 2013. Analysts expect natural gas E&P activities in North American countries to pick up, after the commodity crosses the $5.50 mark. Currently natural gas is trading at $3.40, which is nearly 62% away from the estimated $5.50.

Despite the low valuations, investors should stay distant from this stock due to the absence of positive triggers.

 
 


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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