Market Overview

Oil Service Stocks That May Benefit From Mexican Energy Reform

A decline in oil output since 2004 has prompted recent energy reforms in Mexico. Analysts at Merrill Lynch feel Baker Hughes (NYSE: BHI), Ensco (NYSE: ESV), National Oilwell Varco (NYSE: NOV) and Schlumberger (NYSE: SLB) are among the big oil services companies positioned to benefit from increased activity in the area.

Mexico has the third-largest proven oil reserves in the region. The government estimates that, with assistance from large foreign integrated oil companies, it could extract 27 billion barrels of deep-sea crude oil, up from an estimated 15 billion barrels currently.

Note that other oil services stocks Merrill Lynch recommends now for the same reason include Cameron International (NYSE: CAM), which does not offer a dividend, as well as Noble (NYSE: NE), where the Merrill Lynch price target is the same as the consensus one, and Weatherford International (NYSE: WFT), which has struggled with ethics and tax issues.

See also: Brent Climbs As Egypt Prepares For Another Day Of Conflict

Baker Hughes

The rig count of this Houston-based company was up 13 last week while the total U.S. rig count was down four. Baker Hughes sports a market capitalization of more than $20 billion and has a dividend yield near 1.3 percent. The long-term earnings per share (EPS) growth forecast is more than 16 percent.

However, the most recent consensus recommendation of the analysts surveyed by Thomson/First Call who follow this stock was to hold shares. Although, their mean price target, or where the analysts expect the share price to go, is about 13 percent higher than the current share price. Merrill Lynch sees more than 20 percent upside potential.

Shares have traded mostly between $44 and $48 since April, but the share price currently is up more than 11 percent year-to-date. Over the past six months, the stock has underperformed the broader markets, as well as larger competitors Halliburton (NYSE: HAL) and Schlumberger.

Ensco

This London-based company attributed better-than-expected second-quarter results on rising offshore rig rates. Ensco has a dividend yield of about 3.6 percent and a market cap of about $13 billion. Its return on equity is about 18 percent, and the long-term EPS growth forecast is more than 16 percent.

Of the 39 analysts polled, 12 rate the stock at Strong Buy and another 15 also recommend buying shares. The analysts see plenty of headroom for shares, as their mean price target is more than 17 percent higher than the current share price. The Merrill Lynch price target suggests more than 25 percent potential upside.

The share price has pulled back more than seven percent in the past month. It is more than nine percent lower than at the beginning of the year. Over the past six months, this stock has underperformed Diamond Offshore Drilling (NYSE: DO) and the broader markets but outperformed Transocean (NYSE: RIG).

National Oilwell Varco

This Houston-based company declared a dividend last week and recently made the Goldman Sachs list of the 40 cheapest stocks. Its market cap is about $31 billion, and its dividend yield is near 1.4 percent. The long-term EPS growth forecast is almost 12 percent. The price-to-earnings (P/E) ratio is less than the industry average.

All but six of the 32 surveyed analysts recommend buying shares, while none of them recommends selling shares. The consensus price target indicates more than 12 percent potential upside. However, the Merrill Lynch price target is more than 15 percent higher than the current share price.

Shares have traded mostly between $66 and $74 since last November. The share price is less than four percent higher than at the beginning of the year. The stock has underperformed competitors Halliburton and Weatherford International, as well as the broader markets, over the past six months.

Schlumberger

Analysts expect to see sequential and year-over-year growth of both earnings and revenue in the current quarter. Schlumberger has a dividend yield near 1.5 percent and a more than $108 billion market cap. The long-term EPS growth forecast is more than 17 percent and the return on equity is about 21 percent.

Of the 34 surveyed analysts polled, 13 rate the stock at Strong Buy and another 17 also recommend buying shares. Analysts see room for shares to run, as their mean price target is more than 15 higher than the current share price. The Merrill Lynch price target suggests more than 22 percent upside potential.

Shares jumped about 15 percent in July to a new multiyear high. The share price has pulled back more than two percent since then. Schlumberger has underperformed Halliburton and the broader markets over the past six months, but it outperformed Baker Hughes.

See also: BP Is Now Also Litigation Inc.

At the time of this writing, the author had no position in the mentioned equities.

Posted-In: Baker Hughes Cameron International diamond offshore drilling ensco halliburton Merrill Lynch National Oilwell VarcoTrading Ideas Best of Benzinga

 

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