Which Oil Service Name to Buy Among Polarized Views From the Street?

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

There have been a wide variety of comments coming out regarding the outlook for the oil services industry. The other day, Goldman Sachs produced a report that stated that investors hold a bearish point of view on this industry. Credit Suisse recently published a report that states that chances of oil field service companies beating the consensus estimates are more than missing them. Oil field service is just one example of an industry that has attracted diverging points of views from the Street. There are many others out there. And that is not surprising.

I haven’t made my point as yet. Contradictory points of views also contain an investing theme within them. The key is to look for those ‘common’ companies that have got a buy or sell recommendation from analysts on both sides of the table (i.e. bullish and bearish). Let’s have a look at the oil field service sector and comments from both Goldman and CS analysts.

CS likes Baker Hughes, Goldman doesn’t

Some time back, CS highlighted its confidence in Baker Hughes (NYSE: BHI) second quarter estimates, as North American (NAM) margins on the net could be better than the market currently expects, given advances in the company’s 24-hour pressure pumping, or PP, work. Baker’s 24-hour PP work is now approximately 45% and could potentially hit 60% by year-end (current stated goal is 50%). The Gulf of Mexico (GoM) continues to improve, the Canadian breakup is as expected, indicating North America (NAM) net could be better than the market currently expects. Overall, CS expects U.S. 24-hour work to offset Canadian seasonality.

On the other hand, GS has a neutral recommendation on Baker Hughes. GS believes that Baker is gaining on its market share in the U.S. However, the 24-hour operation is likely to be a great strain on the organization’s supply chain, and GS would like to see a track record of strong operating performance in 24-hour jobs before it becomes more favorable on Baker.

Goldman likes Nabors but CS doesn’t

Seldom will you find such a polarized point of view form different players in the Street for a $5 billion company like Nabors Industries (NYSE: NBR). Where Goldman places it on its must-buy list, CS gives it an outright sell recommendation (not even a neutral one!).

Goldman believes that Nabors offers opportunity for margin bottoming in the second quarter following several years of margin declines. The company also offers self-help upside in its various businesses, and there is much more “low hanging fruit” that the company can act on.

On the international side, the company has seen several years of consistent income pressure, and this is expected to turn around on a secular basis in the second quarter, as it gets cost recovery in Saudi Arabia and as several of its rigs start up in Algeria and other markets. In addition, operating costs in Iraq and Yemen have also fallen.

CS, however, believes that land drilling has seen some tough times recently, and this is going to be reflected in the results of all industry players like Nabors. Land drilling margins will take the biggest step down this quarter, which is largely driven by the sustained effects of contract re-pricing last year.

Moreover, a decline in margins of certain segments of Nabors is expected, given that the pressure pumping market remains ~20% overcapacity and large players like Halliburton and Baker Hughes are becoming more aggressive in winning the coveted 24-hour contracts. Similarly, Well servicing has not seen improvement, as demand remains low for work over rig services as horizontal wells have seen any meaningful remediation work done. CanRig (Nabors segment for well servicing) orders are expected to be down ~50% sequentially as new-builds enter the market at more tempered pace.

What about Halliburton?

Halliburton (NYSE: HAL) has been recommended as a buy by both CS and Goldman. Both believe that the company will use its heavy cash reserves to execute share repurchases. The company has approximately $1 billion at its disposal that can be put to this use.

Both believe that the company has a superior position in North America, its Clean Stim fractionation fluid project is picking pace with market share increasing from 7% last year to 32% in 2013. North American margins should get a 100 basis point improvement in the second quarter due to lower guar inventory levels. 75% of the pressure pumping fleet is doing 24-hour work, 85% is contracted, and the effective utilization is 60%-70% which is a phenomenal rate.

Both agree that the company is suffering in Mexico given sluggish growth in Latin American region. However, this will be offset by strength in North America.

Final word

To find a common rating on companies is often an easy way to invest and make money. Halliburton seems to receive favorable comments across the Street and hence is recommended as a buy given the confidence that analyst have put in the stock despite its +30% performance since the start of the year. 

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Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Halliburton. 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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