Morgan Stanley Calls Bottom In Oil Services

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One the hottest topics of debate on Wall Street in recent months has been calling the bottom in the oil & gas space. According to a new report released today by Morgan Stanley Research analyst Ole Slorer, the tide is finally starting to turn for global oil services stocks.

Retest
The Oil Services Sector Index (OSX) recently experienced a retest of its previous March lows. Slorer explains that this type of retest has been a common occurrence during previous oil downturns and is often driven by sentiment and/or market volatility. Given the recent price dip, Morgan Stanley now sees a very favorable risk/reward balance for investors, and Slorer sees up to 60 percent upside in the space over the next 6-9 months with only about 10 percent downside risk.

Higher oil prices on the way
Morgan Stanley believes that much higher oil prices are needed to balance the oil market in the long-term and sees the current $50-60/bbl environment as unsustainable. “Although $60 WTI is sufficient to deliver an incremental 2 mmb/d of shale production through 2020, additional production requires $80-100/bbl,” Slorer explains.

Slorer sees $90/bbl as the long-term Brent price that is necessary to balance the market.

Green shoots
Morgan Stanley has begun to see signs that global oil production is getting under control. U.S. rig counts appear to have stabilized well below the level necessary to sustain production, Brazil production was recently revised well below consensus expectations, and a close look at Iran indicates that legacy fields will likely not witness a robust recovery.

Stock picks
With earnings season set to kick off for the oil services industry next Friday, Morgan Stanley likes Schlumberger Ltd SLB as its top stock pick in the space.

In addition, the firm likes Core Laboratories NV CLB, Frank’s International NV FI, Patterson-UTI Energy Inc PTEN, Nabors Industries Ltd NBR and Helmerich & Payne Inc HP.

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Posted In: Analyst ColorUpgradesCommoditiesMarketsAnalyst RatingsEnergyOil & Gas Drilling
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