Three Names to Watch on Global Fracking

 | Dec 26, 2013 | 9:00 AM EST  | Comments
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bhi

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slb

I have covered the domestic energy boom enabled by fracking and other drilling technologies many times on these pages. This development has driven numerous investment selections and myriad stock market winners in the two years I have written for TheStreet.com.

Fracking has mostly been a domestic theme over the past few years. I anticipate this technology will be exported more globally in the future. Signs are already present. Mexico has just opened its energy industry to outside investment, hoping to accelerate production from both their offshore and shale sources.

Although Europe has been resistant to fracking and most fossil fuel production, exploratory activity is going on in Poland. Even Argentina, the semi-socialist and serial defaulter, is trying to attract foreign investment and technology to unlock their shale resources. Their resources are estimated to be the third or fourth largest on the planet.

This puts the global oil services arms merchants that supply this fracking technology and associated services well-positioned from a long term perspective to ride this development as it goes global.

Halliburton (HAL) is one of these large oil services plays that I believe will do well in the coming years. In addition, the shares are fairly cheap at less than 12x forward earnings. Halliburton looks to have a solid year in 2014. Revenue growth is projected to accelerate to 10% in the coming year from just 3% this fiscal year as exploration and production capital budgets look favorable going into 2014.

Barclays recently upped its price target to $86 a share from $76 on Halliburton, which is more than 60% above the current stock price. The company also should emerge a winner as the industry consolidates. Halliburton management recently reiterated that it will continue to make numerous small and targeted acquisitions.

It is hard to talk about these global arms merchants and not mention Schlumberger (SLB), the largest oil services provider in the world. The company has excellent relationships with the large oil companies, significant geographic diversification and technologically-complex product and service offerings. The company generates some 70% of its revenues overseas and is ideally situated as fracking goes global.

Consensus earnings estimates for FY2014 have been moving up over the past three months and Schlumberger seems ready to print 10% revenue gains in the New Year. The stock goes for around 15x forward earnings, which is right in line with the current overall market multiple. That's not as cheap as Halliburton, but not expensive given its global growth prospects and footprint.

Baker Hughes (BHI), a slightly smaller oil services concern than either Halliburton or Schlumberger, might be worth a look at these valuation levels as well. The stock has pulled back a bit since November as it has had a temporary disruption in its Iraqi operations following an earnings report that easily beat expectations in mid-October.

Earnings were slightly down this fiscal year from FY2012. However, analysts expect Baker Hughes to deliver better than 30% year-over-year earnings gains in FY2014 on back of a 10% revenue increase. Stock sells for just below 13x forward earnings and less than 8x operating cash flow.

All three of these stocks slightly outperformed the overall market in 2013. They are not as cheap as they were to start the year. I believe they are nicely situated over the longer term, however, to continue to take advantage of the increasing use of fracking and associated technologies and services.

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