2 Oil Well Service Stocks Indicating Market Undervaluation
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I like to think of all economic activity boiling down to retailers and manufacturers. In the oil & gas sector, there are the developers, or "retailers," if you will. They are typically the upstream drillers and contract with oil well service providers, or "manufacturers." In my view, all too often the market forgets about these "manufacturers,” which is why I am highly bullish on the oil well service industry. As oil & gas trends rise above greater economic activity, this area is likely to see a substantial boom that will, at the very least, lift multiples up to historical levels.
Halliburton - Operations Abroad To Offset Domestic Margins Erosion
Halliburton (NYSE: HAL) comes equipped with one of the strongest economic moats in the business. Domestic business has been tough, but the market has overblown headwinds. The second half of this year is likely to be challenging, given expectations that the price of guar, which is used for pressure pumping, will peak in the third quarter. Management insists, however, that there is no input pressure outside of frac, which I believe the market is not accounting for. My own view is that the market will stop being myopic when the economy has fully recovered, and will start focusing on 2013—that’s when margins will stabilize due to an industry-wide reduction in supply.
Beyond the domestic picture is, of course, the international story. I anticipate the company winning contracts with Petrobras for drilling & testing. Offshore, I expect the company to expand into Australia and Saudi Arabia for challenging gas development. Very much unlike domestic operations, margins internationally are expected to improve through all segments in the near-term.
As evidenced by the historically low multiples, the market is failing to account for the positives abroad. Perhaps most strikingly, shares of Halliburton are discounting a 50% decline to consensus 2013 EPS consensus figures. This means that now is an attractive entry point.
Baker Hughes Looks Undervalued
Baker Hughes (NYSE: BHI) is also overly discounted against its fundamentals. Second quarter performance was strong for Baker Hughes, with EPS of $1 dwarfing the $0.77 consensus. Excellent domestic margins relative to expectations and sequential improvement in every market abroad drove the beat. Coupled with expectations for greater international activity and a ramp in deepwater drilling, this oil well services provider is an attractive buy.
Domestic operations became more efficient (particularly in pressure pumping) and even offset the higher input costs and soft pressure pumping market. Management anticipates North American margins to at worst be flat in the third quarter. Canada, which represents roughly 17% of the business, has been weak with a slower recovery than originally anticipated. International operations rose dramatically in Europe, the Middle East, and Africa, with margins growing 40 bps to 13.7% abroad. Strong momentum coupled with low multiples makes Baker Hughes a compelling "buy."
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