What impact will higher than previously expected oil prices have on the North American oil field services sector?
Investors can expect continued revenue growth for companies over time as oil prices should sustain levels north of $70 per barrel, according to Bernstein.
The Analyst
Bernstein's Colin Davies upgraded Noble Corporation PLC NE from Underperform to Market-Perform with a price target lifted from $4 to $5.
The Thesis
Bernstein's energy team is modeling for oil prices to average $73 per barrel through 2023, up from a prior forecast of $65 per barrel, Davies said in a note. Confidence should improve in the North American oil field services sector, as higher prices will help support "slightly higher" capital expenditure plans for 2019 that will still leave companies mostly cash positive, the analyst said.
While U.S. investment will account for much of the growth in spend, a "tempering" of the pace in the Permian basin due to a $10-per-barrel differential in Brent and WTI prices will "create a more balanced picture," Davies said.
But it will also offer some "long-awaited support" for the international operations of American companies like Schlumberger Limited SLB, he said.
Noble Upgraded
Bernstein's bearish stance on Noble came to an end for three reasons, Davies said:
- The company's strong exposure to the high specification jack-up sector, where the market has "found a floor."
- Management succeeded in de-risking the company in the near-term by rescheduling maturities into the next decade.
- Noble is a possible takeout candidate amid industrywide consolidation activity.
These three factors should provide "some underpinning and support" for Noble's stock, despite a weak backlog and cash flow and a high debt load, the analyst said. Bernstein's prior short thesis is now unlikely to materialize without a notable downturn in oil prices, which "seems less likely" than in the past, he said.
A bullish stance on Noble's stock cannnot be justified, as it would require strong contracting improvement, especially in the deepwater drillship assets, Davies said.
Noble holds two warm-stacked, high specification drillships in the Gulf of Mexico that remain idle and struggle to find work, and any material recovery in the deepwater rig market is "further out," the analyst said.
Price Action
Noble shares were up 1.58 percent at the time of publication Wednesday.
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