Drilling Down on Oil Services: 6 Ways to Play Sector Strength

It's no surprise to investors -- or consumers filling up at the gas pump -- that oil prices are on the rise. One group, however, that welcomes this trend is oil services stocks that see increasing demand as the oil & gas industry seeks to boost supply. Several leading advisors and contributors to MoneyShow.com highlight their favorite ways to play market strength in the oil services sector. Sean Brodrick, WealthWave Technically, we're seeing oil coil up for its next big move -- the next big phase of the energy bull market. My target remains $138 a barrel. But considering that crude has spent two months building a base, my target may be on the low side. U.S. oil production is now at 11.9 million barrels a day. That's way above the pandemic lows, though still below the peak we hit in 2019. High oil prices mean the major oil companies are raking in cash. In fact, the five biggest Western oil companies reported $39.5 billion in cash flow in the most recent quarter. That's the highest amount since another oil boom, back in 2008. As prices go higher, oil producers get dollar signs in their eyes and put more rigs to work. I don't have a crystal ball, but here's an easy one-two prediction: 1) higher for longer oil prices will cause more oil companies to put more rigs back to work and 2) U.S. production will approach 13 million barrels per day -- last seen in March of 2020 -- probably sometime in the next year to 18 months. Here's the thing: With so many rigs going back to work, there's one industry that stands to make a heck of a lot of money: oil services. After all, they're the ones with the drill rigs. And this trend isn't very difficult to play. There are a bunch of good oil services ETFs. One of the most popular is the VanEck Oil Services ETF . Its top holdings include Schlumberger , Halliburton and Baker Hughes . It has an expense ratio of 0.35%. And it's channeling higher. Technically, OIH sure looks like it's going back to test its recent high. From there, I expect a breakout and a rally to $355 a share. That's a 20%+ move from recent prices. In my view, this oil services ETF is an easy way to play this up move in energy. Elliott Gue, Energy & Income Advisor Supply is the big tailwind for energy right now, not demand. The only way to address the current supply shortfall, and for Europe and other regions to enhance their energy security and reduce reliance on Russia, is for oil and natural gas prices to remain elevated enough to encourage development of new sources of global supply. That's a trend that plays right into the hands of the global oil services industry -- these are the companies with the technology, equipment, expertise and experience needed to help large producers develop and produce oil from new projects. Our two favorite services firms to buy right now are Schlumberger and Baker Hughes , which we rate as buys under $47 and $40 respectively. In Q1 2022, Schlumberger earned $0.345 per share, which was around 9% above Wall Street estimates. One major point SLB brought up on its earnings call is the growing importance of energy security. In other words, rather than just sourcing oil from the cheapest suppliers, or prioritizing environmental factors when buying supply, countries increasingly care about diversifying their oil and gas supply to prevent over-reliance on any one producer. That, in a nutshell, is the main driver of Europe's current mess -- with the region garnering as much as 40% of its natural gas supply from Russia. The effect of this is that more countries will likely seek to develop their domestic supply to cut reliance on imports. It will also spur development or new oil projects in new markets. And, all of these shifts mean more spending in more markets, which plays directly into services providers' hands. SLB indicated the initial consequence of the recent spike in oil and gas prices, and new-found prioritization of energy security, was an uptick in short-cycle spending -- primarily short-cycle refers to US shale producers. What's also needed is more investment in conventional long-cycle supply -- oil and gas projects that can produce sizable volumes at a steady and predictable rate for many years. Thus, SLB sees international long-cycle spending ramping up fast in the second half of 2022. What's really important, however, is that SLB sees exploration activity picking up starting this summer. Services related to exploring for and developing new fields, particularly more complex and technically hard-to-produce oil developments are SLB's core competency. Given the uptick in international spending and investment needed over the next few years, it's even possible that the current energy investment cycle could drive profit margins to the levels seen in the last golden age for the group in 2006-08. Against that backdrop its not hard to make a case for SLB's earnings to approach the $4 to $5 range by 2025. SLB has often fetched multiples in the 15 to 20 times range at the peak of an oil services cycle; simply put, it's not tough to make a case for SLB to eventually trade to trade to the $70 to $90 range over the next few years. We're raising SLB to a buy under $47. Baker Hughes narrowly missed Q1 estimates. It appears the main headwind for BKR in the quarter was Russia, which accounted for about 4% of Q1 revenues. The company is halting new operations there and its likely sanctions will make it difficult for it to operate there, perhaps even forcing a full shutdown in operations there later this year. However, it's worth reiterating that Russia is only around 4% of revenues and only generates an estimated 7% of BKR's annualized EBITDA. We'd expect the Russian hit to be more than offset by increases in oilfield services spending in other major global markets. Russian impacts are also already well-known and factored into expectations for BKR's earnings. Moreover, our primary rationale for recommending BKR remains the company's liquefied natural gas (LNG) business and the news on that front continues to get better. Management estimates that global LNG liquefaction capacity will need to grow to around 800 million metric tonnes per annum (MTPA) from 460 MTPA currently just to meet anticipated demand for the fuel. However, there are only 150 MTPA of new capacity currently under construction worldwide and, in order for new capacity to be in service by 2030 a company would need to make a final investment decision by 2025. That implies that, over the next three years or so, an additional 200 MTPA of project awards and considerable growth for BKR's business. We rate BKR a buy under $40. Mike Cintolo, Cabot Top Ten Trader Fluor is a leading engineering firm, providing construction, maintenance and project management services for the oil and gas and power generation industries. While revenue in Q1 of just over $3 billion was down 7% from a year ago, it beat the consensus by 7%, while per-share earnings of 16 cents missed estimates by 6 cents. Indeed, the strength of its energy solutions is really all about what's likely to come; in Q1, awards in its top-performing energy segment included a notice to proceed contract for a modular mid-scale liquified natural gas project offshore in the Gulf. The company reaffirmed its 2022 earnings mid-point guidance of $1.28 per share (in-line with the consensus) and said it's targeting $2.70 per share (a double in two years) for 2024 as the wave of new contracts are executed on. Moreover, the firm said that dividends and share buybacks are possible as it continues to build the backlog and improve cash generation. Analysts see earnings up 25% this year with even faster growth in 2023, while the valuation (26 times trailing earnings) looks reasonable. High domestic oil prices bode well for companies that provide services related to hydraulic fracturing (or fracking), which involves active drilling. NexTier Oilfield Solutions is focused on providing these services mainly to U.S. energy companies (i.e., not much exposure overseas, which can be a blessing given the world environment). Aside from having one of the nation's largest pressure-pumping fleets, it offers other shale-related services, including optimized trucking, power solutions and equipment monitoring. In the first quarter, NexTier said demand for its solutions was very strong with available frac capacity almost fully utilized and which management said would allow the firm to deliver profitable growth, accelerating free cash flow and strong returns. Revenue of $635 million in Q1 mushroomed 178% from a year ago and beat the consensus by 12%. And though per-share earnings of 4 cents missed estimates by a cent, the company noted that the accelerating exit rate late in the quarter suggested significant upside for Q2. The company operated an average of 33 deployed fleets in Q1, up from 10% from the prior quarter. Well construction revenue rose 13% sequentially, while completion services sales increased 25%. NexTier further achieved positive free cash flow in Q1 (ahead of schedule), which the firm said will enable it to generate returns above its cost of capital later this year - a critical milestone for the business. For Q2, Wall Street expects 160% revenue growth while NexTier sees momentum building as it heads into its seasonally strong period, with continued profitability beyond the quarter. Analysts see earnings of 84 cents per share this year, but that's up from a guesstimate of just 33 cents three months ago, so it should prove conservative. We think it's a good risk-reward situation around here.

Drilling Down on Oil Services: 6 Ways to Play Sector Strength

With so many rigs going back to work, there's one industry that stands to make a heck of a lot of money: oil services.

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