When to Make a Move in Oil Services
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With the price of oil and natural gas slumping this past quarter, there were expectations that several of the big players in the oil services industry would not have the best of quarters. Surprisingly, all three of the big guns in the industry (Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI)) were resilient and were able to beat Wall Street estimates.
The good, the bad, amd the ugly about last quarter
The most pleasant surprise came when Baker Hughes posted a 30% increase in earnings per share compared to Q2 2011. Baker Hughes showed the most promise in the North American region while Schlumberger and Halliburton saw much of their success in the international markets.
While the slowdown in GDP is a contributing factor to the slowing of the North American market, one should point out that the spring break-up in Canada did play a big part as well. This is a factor that is expected in the second quarter.
The biggest fumble came from Halliburton making a big purchase of guar gum, only to have it come back and bite them. This plant product is a key addition to fracking fluid. While they were trying to protect themselves from price fluctuations by stocking up over the past quarter, they got to eat crow as the price of the guar gum sequentially dropped. This took a big chunk out of Halliburton, but certainly is not a dire situation for the following quarters.
Timing is Everything
Over the long term, all three of these companies are solid additions to a portfolio. Each company has been a solid dividend payer for the past 12 years and they do not appear to be changing that stance any time soon. So the most critical aspect of adding a company like these would be to do so when the stock price is delivering the greatest value. If companies like these can be picked up at the right price, they have the potential to deliver big returns.
While this is not a revelation by any means, the price of oil and gas over the past year has been a pretty firm indicator of stock price for these companies. As seen in the chart below, the price of these companies has closely followed the spot prices of Brent crude and natural gas.
Source: Ycharts
Again, this shouldn't come as a surprise. With natural gas prices hitting their 12-year low last quarter, Halliburton has seen many of their gas operations suspended and several projects are mothballing for the foreseeable future until demand picks up. I would expect the trend of winding down from less lucrative ventures will continue if current prices still persist. Conversely, a jump in oil and gas prices could reverse these trends quickly.
Expectations for Q3
Since that big tumble in price in the past quarter, it appears that both oil and gas are starting to show signs of health. Natural gas spot prices have increased over 65% since that April low. Oil is also seeing a slight uptick, with Brent crude prices and benchmark US crude flirting in the $100 and $90 per barrel price range, respectively. It is still tough to tell if these upward movements are going to be sustainable. Here are a few factors that could disrupt this:
- US inventory levels are increasing, so demand may slacken.
- China is ratcheting down its growth numbers.
- Europe’s woes; I think everyone knows how much they have been a factor on the global economy as of late.
To Buy, or Not to Buy
Let me reiterate, picking up one of these companies would be a solid pickup for any portfolio. The point is, of course, to attain these stocks at the greatest value possible. By attentively watching these stocks in the upcoming quarter, a patient investor could tap into some good value. With so much winding down and mothballing happening in the past quarter, it will probably take them more than a quarter to turn the ship around and ramp up production again. I would probably sit this one out for a while and wait to see some of the operational results for the upcoming quarter before I made a move.
TylerCrowe has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and Schlumberger. 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. If you have questions about this post or the Fool’s blog network, click here for information.
