Lots Of Energy Left In Oilfield Services

The oilfield equipment and services industry has enjoyed a tremendous run, with stocks averaging a return of 79% over the last 12 months and 48% annualized over the last three years. Investors are concerned about whether the group can continue to deliver such lofty returns, given uncertainty surrounding the future of energy prices. But despite the risks, the industry still warrants exposure.

Today’s high level of capital spending reflects the energy sector’s efforts to develop new reserves, needed to replace declining mature fields and boost production growth. Development projects can take years to reach full production, and current operations may not affect energy prices for some time.
The jump in spending may be partly attributable to political pressure. Congress has proposed raising taxes on companies that reaped enormous profits from rising energy prices, and may also increase scrutiny of the industry’s pricing practices. Higher capital spending can increase depreciation and lower reported profits, and the prospect of higher taxes might drive energy companies to spend a little more.

Government-controlled foreign oil producers in need of more modern technology are also likely to increase capital spending. All of the oilfield services companies we cover should benefit from higher capital spending.

Among the 143 groups scored by our Quadrix stock-rating system, oilfield services ranks second for momentum (recent operating results) and eighth for overall score, with a 75. The average oilfield-services stock trades for 14 times estimated year-ahead profits, well below the industry’s five-year average forward price-earnings ratio of 20. We monitor three companies in this industry, all of which are discussed below.

Forbes