JPMorgan Downgrades Superior Energy To Neutral; Helmerich & Payne, Patterson To Underweight

Oil prices have moved up in 2016, with the OSX gaining 27 percent and WTI up 32 percent from the February 11 bottom. Terming investor hopes of further gains in oil prices as unrealistic, JPMorgan’s Sean C. Meakim mentioned that a sustained rally from here could result in a “less pain, less gain” outcome for oil services, rather than representing the early stages of the next bull cycle.

“We think there is considerable scope for crude oil to trade in a range (perhaps between $30 and $60) for an extended period, while the market seems to be assuming a straight line to the high end of that range through the rest of the year,” Meakim wrote.

Onshore Drilling Stocks Sporting Inflated Multiples

Meakim noted the implied expectations for U.S. onshore are too aggressive and that onshore drilling stocks are sporting inflated multiples. He said, “After the group’s recent run, we’re paring back ratings where we think expectations have run too hard too fast or upside from here appears limited.”

Related Link: "Peak Oil" Not Until 2035, Demand "Could Well Be Stronger" In Coming Years

Helmerich & Payne, Patterson

The analyst downgraded the ratings for Helmerich & Payne, Inc. HP and Patterson-UTI Energy, Inc. PTEN from Neutral to Underweight. The price target for Helmerich & Payne has been reduced from $43 to $39, while the price target for Patterson-UTI Energy is set at $13.

Although both Helmerich & Payne and Patterson-UTI have strong management teams and are among the few investable names in the US onshore segment, shares of the two companies have “run too hard, too fast,” Meakim commented.

“While we expect solid execution from both HP and PTEN to continue, we are skeptical of the macro environment required to deliver on the current elevated multiples embedded in each stock,” the JPMorgan report added.

Superior Energy

Meakim downgraded the rating for Superior Energy Services, Inc. SPN from Overweight to Neutral, with a price target of $13. He noted that the company has faced several challenges in the recent quarters and is likely to have a difficult 1H as well.

The analyst added, however, that cost adjustments should provide some support to the company in the second half of the year.

“Overall, we continue to like the diversification, relatively strong balance sheet, and M&A optionality SPN offers in a better environment compared to the balance of our small/mid-cap coverage,” the report stated. The expected lumpiness the company’s results in the near future makes the risk reward more balanced, Meakim added.