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Morningstar | Falling Oil Prices Have Made Oilfield Service Stocks Very Cheap Again

Falling oil prices over the past several months have pushed oilfield service stocks into very cheap territory. West Texas Intermediate crude has fallen from over $65/bbl in late April to about $51/bbl today, below our midcycle forecast of $55/bbl. Our median covered oilfield service company is trading at a 20% discount to fair value. Valuations look about as cheap as they did last December, when many names breached 15-plus year lows.

For oilfield service companies, we think the market is pricing in overly pessimistic views on growth in oil and gas capital expenditures, as we've previously highlighted. In particular, we forecast a cumulative 20% international capital expenditures growth through 2022, due to the long-term upward trend in development costs as well as the rectification of underinvestment by many oil producers currently. By contrast, the market is pricing in almost flat international capital expenditures.

Best Idea Schlumberger remains our top pick, trading at a 44% discount to our fair value estimate. Schlumberger has the highest international share of revenue among peers, making it best positioned to take advantage of the capital expenditures rebound. Also, we think the company is poised to gain market share via its efficiency-boosting integrated project initiatives.

The market wasn't encouraged by Schlumberger and peers' reports of tepid international services pricing in the first quarter, but we think activity increases plus disciplined behavior by the major players (which continue to compete in relatively oligopolistic markets) will lead to improving pricing in the next few years.

Halliburton also looks attractively priced. Our long held bearish thesis on the stock has more than played out, and sentiment has become so negative that the stock now looks cheap to us. Halliburton will benefit from the international capital expenditures recovery just like Schlumberger. Also, while we have long cautioned about the competitive headwinds that Halliburton faces in U.S. shale, we don't think Halliburton's U.S. shale profitability will disappear overnight (nor do we think all of its U.S. shale economic profits will erode over the long run). The market has become overly discouraged by the short-term slowdown in U.S. shale activity (caused by temporary pipeline bottlenecks), in our view.

Likewise, TechnipFMC looks cheap. The company's subsea end market will benefit from a sharp rebound in offshore capital expenditures in coming years, and we think TechnipFMC will also gain market share due to its leading capabilities in integrated projects.

Finally, NOV also looks like a bargain. NOV has underperformed the OFS sector along with the offshore drillers for the past two months. Within its Rig Technologies segment, we don't think the market implied outlook can get much worse. We assume virtually no rig newbuilds in our forecasts, with instead our projected segment revenue coming from drillers’ maintenance capital expenditures, which should increase steadily in coming years. NOV’s non-Rig segments will benefit from the ongoing recovery in overall global capital expenditures, (as they compete in many of the same product lines as Schlumberger and Halliburton).

For more details, please see our recent report, "Oilfield Services Stocks Haven't Been This Cheap in Over a Decade."