Oil pump jacks
Paul Ratje/AFP via Getty ImagesGoldman Sachs analyst Neil Mehta thinks some oil service companies have promise, and investors should buy their stocks — but it has little to do with a rebound in oil drilling.
Oil service companies have been struggling because oil producers are cutting their budgets. Mehta doesn’t expect much of a pickup in the oil patch, given that most oil producers want to stay lean and drill only their most promising plays. Investors are tired of fast-drilling companies that never seem to produce a profit, and producers have finally gotten the message.
The upside to the oil service industry will mostly come from new services and technologies that could propel earnings in the years ahead, Mehta predicts.
Goldman’s favorites are Schlumberger (ticker: SLB), Baker Hughes (BKR), and Liberty Oilfield Services (LBRT). He rates Halliburton (HAL) and NOV (NOV) at Neutral and Helmerich & Payne (HP) at Sell.
Schlumberger is attractive because the company is offering new digital services meant to streamline oil production. It now sells software as a service to clients, opening up a new revenue stream that can offset its struggles in the otherwise slow hardware-centric industry.
Mehta thinks that the digital tools are worth $15 billion to $20 billion of Schlumberger’s projected enterprise value of $55 billion in 2023. “A valuation re-rate that recognizes this potential could result in meaningful upside to the company’s stock,” the analyst wrote. His price target on Schlumberger is $38. The stock was up 0.5% Thursday morning, to $32.27.
Baker Hughes has potential in areas outside of traditional oil drilling. The company is involved in hydrogen, carbon capture, and liquefied natural gas (LNG), Mehta notes.
“Baker highlighted on its first-quarter call that the total addressable market for its CCUS offerings [carbon capture, utilization, and storage] could be $35 billion to $40 billion by 2030,” Mehta wrote. The company also stated that for hydrogen, it expects a total addressable market of $25-30 billion by 2030. At even a low single digit market share, these markets present a sizable revenue opportunity for the company.” Mehta’s price target on Baker Hughes is $29. The stock was up 2.3%, to $24.51, on Thursday.
For Liberty, the market may be underestimating the company’s potential profitability after it absorbed a majority stake in Schlumberger’s hydraulic fracturing business last year.
Liberty, now the second-biggest fracking player in the U.S. after Halliburton, should rise as pricing rises in the industry too, Mehta asserts. He sees shares rising to $17. Liberty was up 0.8% to $13.83.
Write to avi.salzman@barrons.com
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