Key Point
- Oilfield services companies are in a supercycle that creates long-term value for shareholders.
- Valuations and yields are attractive relative to the broader market, and dividends are increasing.
- Stock buybacks reduce the number of shares and increase shareholder value.
- 5 brands I like better than Schlumberger
The oilfield services industry is still in a super cycle. However, the first quarter results were in line with expectations and did not set new highs for each company. Importantly, these stocks are trending higher and any pullback in price action makes them an attractive entry into the sector. Low valuations and attractive dividends are driving shareholder value. Other drivers include sustained double-digit business growth, expanding margins, and solid support from analysts.
Oilfield services have value: Oilfield services have value
(As of April 30, 2024 Eastern Time)
- 52 week range
- $27.84
▼
$43.85
- dividend yield
- 1.81%
- PER
- 12.97
- Target stock price
- $48.65
The oil industry and oilfield services tend to trade at a discount to the overall market, offering a cheaper option than other investments relative to their earning power.shares of S.L.B. New York Stock Exchange: SLB, baker fuse NASDAQ:BKRand halliburton New York Stock Exchange: Hull The S&P 500 trades at 11x to 13x earnings, compared to the highly valued S&P 500, which is close to 20x earnings by mid-2024. The group also offers above-average returns, with yields ranging from 1.7% (above the S&P 500 average) to 2.5%, with all dividends increasing.
Within the group, Halliburton Co. offers the best value at 11x earnings, suggesting the price could expand many times over the next year or two. The dividend is at the lower end of the range, but the safest in terms of payout ratio. Halliburton’s payout ratio is close to 20% of this year’s earnings, and with earnings growth expected, future increases are almost certain. Baker Hughes has the highest yield at 2.5%, and its dividend payout ratio is approximately 45%, making it a safe yield. With a payout ratio of 45%, there’s plenty of room to grow the dividend over time.
First quarter results were disappointing: analysts see the group as undervalued
The oil field service giant’s performance was lackluster compared to analysts’ expectations, but there are some mitigating factors. The first is that analyst expectations have inflated after several years of outperformance by the group. Second, as expected, two of his three companies had double-digit sales growth, all of them grew, and profit margins were strong, if not expanding. is included in the results. This news did not lead to many analyst upgrades or upward revisions, but it did not change the bullish sentiment.
baker fuse
(As of April 30, 2024 Eastern Time)
- 52 week range
- $26.81
▼
$37.58
- dividend yield
- 2.58%
- PER
- 18.22
- Target stock price
- $40.94
These stocks are rated Moderate Buy or Buy and are trading below analyst minimum targets. Halliburton’s minimum upside is expected to be the smallest at about 6% compared to analysts’ target ranges, followed by SLB’s 8% and Baker Hughes’ 10%. Consensus numbers are more attractive, with Baker Hughes and Halliburton projecting an upside of 25% and SLB predicting an upside of 40%. The respective consensus has increased compared to last year and has remained stable over the past 90 days, and this situation is unlikely to change absent a change in outlook.
schlumberger
(As of April 30, 2024 Eastern Time)
- 52 week range
- $42.73
▼
$62.12
- dividend yield
- 2.32%
- PER
- 15.77
- Target stock price
- $68.72
Stocks held by institutional investors are strong. Institutional investors own over 80% of these stocks, and have been buying a good balance over the last year. This trend is expected to continue until the end of the oil field supercycle.
Oil field supercycle begins
The oil field supercycle has been fueled by a decade of underinvestment by the oil majors and a shift to greener operations. The end result is increased capital investment focused on efficiency, modernization, green technology, new well development, and exploration. This means further growth in oilfield services is expected in the second quarter of 2024.
Second-quarter revenue growth, including overall margin strength, will be 12% for SLB, up from 3.4% for Halliburton. Baker Hughes is expected to have the highest earnings growth rate of nearly 25%, and next year’s forecast is for these companies to either maintain growth from current levels or accelerate. Q2 results could be a sure catalyst for this group. Analysts are forecasting strong growth and profitability, but have lowered their targets enough to allow for upside.
Hear this before considering Schlumberger.
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