Oil Well Service Stock Roundup: 3 To Consider

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If you are bullish on the natural gas environment, you should start buying the industry's suppliers. Barclays has recently argued that oilfield service companies are trading at a substantial discount to their historical multiples and encourages investors to buy shares. With crude prices at a low and industry-wide consolidation, it is now an ideal entry to gain exposure to rising demand for deepwater equipment and a recovery in the US pressure pumping market. Below, I provide some of the latest news and outlook on three companies.

Why You Should Buy Schlumberger (NYSE: SLB)

Schlumberger is the leading oilfield services company in the United States and is rated very favorably on the Street. Despite holding flat over the last 12 months as the S&P 500 rose 13.8%, A full 27 of 29 reporting analysts rate the stock a "buy" or better, and the other two just say a "hold". The consensus price target of $88.70 is at a 20% premium to the current market cap. And the 12.85% return on invested capital is 262 bps greater than the industry average. So, what are the operational reasons to be bullish about Schlumberger?…

Barclays is forecasting for a 7% increase in global E&P spending abroad next year--setting a record $644 billion. The company has reached a deal with Cameron to produce products targeting subsea oil & gas markets. According to Credit Suisse: "Improving recoveries from reservoirs has been the Holy Grail forever, and if there was a better marriage to find that Holy Grail, it's hard to figure out what it is." Moreover, the decline in crude oil prices has overly depressed the market's expectations, and this is especially the case for Schlumberger given its strength in deepwater and offshore drilling. And the company is hedged against domestic margin compression in light of how 70% of bushiness comes abroad versus just 44% for Baker Hughes.

In addition, the company has done well getting in terms of contracts. It recently reached a $342 million agreement with Statoil for Norwegian continental shelf activity, which includes electric wireline logging services. New regulations in favor of high-specification equipment also position Schlumberger well against competitors, since it can acquire niche producers by virtue of its larger war chest and access to financing. Jim Cramer has encouraged specifically buying Schlumberger to capitalize off of industry-wide consolidation. Organically, the firm is well positioned in its own right with expectations for 16.5% annual EPS growth.

National-Oil Well Varco (NYSE: NOV) Vs. Baker Hughes (NYSE: BHI)

As attractive as Schlumberger is, it is more expensive than peers NOV and Baker Hughes. The former trades at a respective 11.8x and 10.1x past and forward earnings versus corresponding figures of 13.7x and 11.9x for the latter. Analysts are on the fence about Baker Hughes and strongly prefer the cheaper of the two, NOV. I share this preference for several reasons.

First, NOV is on a steeper part of its growth curve--Baker Hughes has seen earnings fall in recent--and is forecasted for 14.5% annual EPS growth over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $9.93. At a multiple of 14x, this translates to a future stock value of $139.02. Discounting backwards by 10% yields a present value of $86.32, a 30% premium to the current market cap. This value gap will be closed from strong exposure to domestic and international shale gas plays. If energy billionaire T. Boone Pickens is accurate and natural gas rises to as high as $5 next year, much of this upside will be felt at NOV. Further, when you consider that third quarter profits came in ahead of expectations in a supportive environment for deepwater equipment, analysts, if anything, have set the bar too low.

Baker Hughes, as mentioned earlier, has too little exposure to international markets. The headwind was seen in the third quarter results when operating income declined 27% sequentially from a 170 bps North American margin compression. Prices fell so much in domestic pressure pumping that revenue of $5.2 billion missed expectations by $210 million. However, I disagree with the Street consensus for a "hold," since Baker Hughes is still on a trajectory for double-digit EPS growth and has little downside with multiples already so low.

TakeoverAnalyst 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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