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Stock Screen: Oilfield Services and Equipment Stocks with Strong Price Appreciation Potential - February 29, 2012
Although fears of a recession in Europe linger, global demand for oil and gas remains robust. Increased industrial development and a growing middle class in emerging markets, along with solid demand in relatively healthy developed countries, is causing energy consumption to accelerate. What’s more, fears of a global slowdown have barely made a dent in oil prices, which remain at relatively high levels due to various geopolitical concerns, heavy speculation activity, and tight supply-and-demand conditions. In the absence of price-competitive energy alternatives, demand growth for oil and gas will likely be quite healthy over the long haul. Further, as an escalating number of land fields reach maturity, more and more drilling will be conducted in service-intensive deep water and hostile deep water environments. As a result, companies that provide services such as drilling and well construction to the oil and gas industry stand to benefit greatly over the coming years.
For this screen, we have chosen three companies in the Oilfield Services and Equipment Industry with projected price appreciation potential in excess of 90% over the next three to five years. Indeed, long-term investors would be prudent to consider shares of Weatherford International (WFT) Transocean LTD. (RIG), and RPC Inc. (RES).
Weatherford International is one of the largest international oil and natural gas service companies. Its products and services are used in drilling, evaluation, completion, production, and intervention of oil wells. Headquartered in Houston, Texas and incorporated in Switzerland, the company also operates in more than 100 countries around the world. In addition, Weatherford has a substantial presence in the Middle East.
When looking at Oilfield stocks, company-specific risk can many times be overshadowed by prevailing industry trends. More so for larger cap companies, share prices often are heavily correlated with macroeconomic factors and their effects on oil prices. However, WFT shares may be priced lower than their future value due to idiosyncratic risk.
Recently, Weatherford shocked the market by announcing that its previously issued financial statements were no longer useful or accurate, as the company is struggling to correct an accounting error. Despite reporting excellent fourth quarter results, Weatherford’s share price plummeted over 10%. As a result, the stock’s price may suffer in the short term as the company tries to regain the confidence of investors. However, in the long run, Value Line analyst Robert Mitkowski believes Weatherford will continue to grow rapidly and capitalize on rising global energy demand. The recent fall in WFT’s share price may represent a favorable entry point for value investors.
Transocean is known as one of the world’s largest offshore drilling contractors. The company offers floating mobile drill rigs to oil and gas companies for around $300,000 per day, along with the equipment and personnel to operate them,. This equipment is capable of drilling to depths of 10,000 feet. Headquartered in Vernier, Switzerland, with offices in over 20 countries, Transocean employs more than 18,000 people and owns about half of the deepwater platforms in the world.
As large as Transocean is, there is no doubt the company’s share price is directly correlated with the global demand for oil. But once again, past mistakes within the company may have caused RIG’s share price to drift away from long-run fundamentals. Transocean owned the Deepwater Horizon, the drilling ship that exploded and sank in the Gulf of Mexico in April of 2010, a disaster remembered as the largest oil spill in United States history.
Recently, Transocean announced better-than-expected fourth-quarter results. Perhaps more important, the company decided to set aside $1 billion for possible liabilities concerning the Deepwater Horizon incident. Investors took this as a sign Transocean may soon reach a settlement, resulting in a 5% stock price increase. We believe the explosion may have caused these shares to become oversold. Like WFT shares, value investors may be offered an appealing entry point to capitalize on this equity’s strong price appreciation potential. Last but not least, Transocean offers a substantial dividend that can help mitigate some risk associated with the company’s stock price.
RPC provides oilfield services and equipment to oil and gas companies engaged in the exploration, production, and development of oil and gas properties in numerous regions around the world. The company has two main segments of operation, Technical Services and Support Services. Technical Services include pressure pumping, coiled tubing, and snubbing, among other things. Support Services offers drill pipe and related tools, pipe handling, and inspection. RPC was founded in 1984 and is headquartered in Atlanta, Georgia.
Unlike the previous two stocks mentioned in this screen, RPC is a mid cap stock that may fly under the radar of funds investing only in large cap equities. Over eight consecutive quarters, RPC has shown an extraordinary ability to increase both its sales and earnings figures. The potential of increased oil production in the United States has driven the stock price on a consistent basis.
RPC also has more growth potential when compared to RIG and WFT. Currently, international markets only represent a meager portion of total sales (around 5%). With countries like China and other emerging markets looking to reduce their dependencies on foreign oil, the need for oil exploration and production services may rise substantially. Such opportunities for RPC may exist in the South China Sea, where a reserve equivalent to more than 80% of Saudi Arabia’s reserves may exist according to Chinese studies cited in 2008 by the U.S. Energy Information Agency. These shares also have a substantial dividend that like Transocean, may help mitigate the risk of a stock price decline.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.