A Forecasted Boom in Oilfield Services a Boon for the Sector's Players    Bookmark and Share

Published Thu, 03 Jan 2013 10:30 CET by TopYields.nl

Some energy market observers and executives hold that oilfield services will see a boom parallel to the Internet boom of the mid 1990s, if oil prices remain at current levels or climb higher. The primary reasons for their upbeat view include the expectation of a strong long-term growth in emerging markets, which amid a surge in the demand and despite the gains in the energy output will threaten to cause an imbalance in the energy market. The tightening of the market conditions and the rising cost of oil exploration and extraction bode well for the long-term growth of the oilfield services market. This sanguine outlook is a boon for the sector’s companies, most of which have solid balance sheets, pay dividends, and boast attractive valuation characteristics.

The optimistic prospects for the oilfield services companies are based on expectations of strong oil and natural gas prices in the next few years. Elevated oil prices are stimulating oil and natural gas companies to seek new energy supplies, even at increasing costs. According to The Economist, over the past 10 years, “the oil industry’s spending on exploration and production has increased fourfold, while oil production is up by only 12%.” Growth of major oilfield service companies has averaged about 10% annually. Robust growth will likely remain the norm, on average, even though some slowing down in activity may be observed in North America, where oilfield activities – including plunging natural gas rig counts and stagnating oil rig counts – are taking a breather after several years of robust growth.

International markets are currently driving the sector’s expansion. A recent survey of more than 300 oil and gas companies by Barclays has found that oilfield activity will boost oil exploration and production spending to a record-high $644 billion in 2013. This will represent an increase of about 7% from the previous year and will be driven mainly by international growth. The pause in boosts to North American spending on oilfield services will likely end once oil prices pick up as the global economies recover, boosting the demand for energy.

What does this mean for the sector’s companies? It means that the short-term profitability of the major diversified North American oilfield services companies – referred to as the Big Four and including Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL), Baker Hughes (NYSE: BHI), and Weatherford International (NYSE: WFT) – will not be as stellar as over the past several years. This is the result of the easing in oil prices relative to the year-ago levels, expensive migration from natural gas to more-profitable oil drilling, and rising input costs (e.g. guar gum shortage that caused a surge in prices). In the near-term, the market players with greater international exposure, such as Schlumberger, will fare better than the ones more focused on the North American oil industry. This is so because international rig counts are rising and margins for activity outside North America are expanding.

Still, the long-term outlook foresees a robust EPS expansion. For example, Schlumberger’s EPS is expected to grow, on average, by 16.2% annually for the next five years. Baker Hughes and Halliburton will see their EPS expand, on average, by 11.5% and 17.7% per year, respectively, for the next half-decade. In the same period, the EPS of Core Laboratories, a provider of reservoir management and production enhancement services, is forecast to grow at a CAGR of 18.3% annually. Ensco Plc, which provides offshore contract drilling services, will see an exceptionally robust EPS expansion, averaging 27% per year for the next half-decade.

Given that most major oilfield services companies are dividend payers with low payout ratios, rising profitability bodes well for their dividend growth in the future. The table below shows the main characteristics of the stocks and dividends paid by several key oilfield services players.

Oilfield Services Dividend Table

Most of these companies represent sound long-term investments. For example, Halliburton and Baker Hughes are attractive on valuation, boasting below-market and below-industry multiples. These two diversified oilfield services companies and Schlumberger have price-to-earnings, price-to-book, price-to-sales, and price-to-cash flow below historical metrics. Subsea 7 and Ensco also boast attractive valuation. Core Laboratories is a good dividend growth stock.

The expected increase in the demand for oilfield services in the future will make this sector attractive for growth-oriented investors. In the meantime, there is a possibility to take advantage of attractive valuations on some of the sector’s players ahead of possible, growth-driven expansion in earnings multiples. While dividend yields offered by most of the sector’s companies are relatively low, dividends of the oilfield service providers have a good chance to see accelerated growth in the future.


Stock name                      ISIN Last trade   P/E EPS Div PS Ex Div Date Payout Ratio Div Yield
P/E ratio of ENSCO on Google Finance
US26874Q1004 29.14   13.3 2.2 3.00 Dec 04 2014 139 10.30
LU0075646355 70.90   4.8 14.6 2.63 Jun 30 2014 18 3.71
P/E ratio of SCHLUMBERGER on Google Finance
AN8068571086 83.68   19.1 4.3 1.70 Dec 01 2014 40 2.03
P/E ratio of OCEANEERING INTERNATIONAL on Google Finance
US6752321025 53.58   13.5 3.9 1.08 Nov 25 2014 28 2.02
P/E ratio of CORE LABORATORIES on Google Finance
NL0000200384 107.86   18.6 5.7 2.05 Jan 21 2015 36 1.90
P/E ratio of HALLIBURTON on Google Finance
US4062161017 41.46   10.2 4.0 0.72 Dec 03 2014 18 1.74
P/E ratio of BAKER HUGHES on Google Finance
US0572241075 58.93   14.9 3.9 0.68 Oct 30 2014 17 1.15

Articles featuring Ensco (ESV):
-8 Prime Challenger Dividend Dogs Mark 30% To 94% New Year Upsides
-49.14% Edge To 5 Lowest-Priced, Highest-Yield January Challenger Dividend Dogs
-22.32% Advantage In 5 Lowest-Priced, Highest-Yield Global Dividend Dogs Of January
-Is Ensco's 10% Dividend Yield Too Good To Be True?
-3.77% Edge For 5 Lowest Price Highest Yield S&P 500 Dividend Dogs
-Top 100 Dividend Stocks - 2015 Edition
-5 S&P 500 Dividend Stocks Yielding Greater Than 5%
-Ensco: Analysis Of The Dividend
-10 Challenger Dividend Dogs Sport 27% To 146% December Upsides
-Challenger DiviDogs: 29% 1-Year Gain Edge For 5 Lowest-Priced, High Yielders In December