HSBC: Oil Field Service Planning For A 'Lower For Longer' Scenario, Upgrades Halliburton To Buy

Phillip Lindsay, HSBC Global Research's Oil Field Service analyst, commented in a note on Thursday that the industry outlook has "worsened" since March with additional E&P capital expenditure cutbacks and further oil price "turbulence."

Lindsay continued that North American rig counts may be "scraping along the bottom" but there are no meaningful near-term catalysts do drive an uptick in drilling activity. At the same time, international drilling activity is "falling at unprecedented rates."

With that said, Lindsay is estimating Brent crude valuations of $55/bbl in 2015, $60/bbl in 2016 and $70/bbl in 2017. As such, the industry is planning for a "lower for longer" scenario, but this may result in growing prospects for industry consolidation as supply chain integration and other synergies may be "necessary" to lower the industry's cost structure.

"Our overall sector stance remains neutral and our ratings profile is balanced," Lindsay wrote. "We favour relatively defensible business models, healthy balance sheets, self-help programmes, and attractive/sustainable shareholder payouts."

Preferred Plays

Lindsay named AMEC Foster Wheeler PLC AMFW as a "preferred play" as the company has shown "resilience" through the first half of the year while committing to preserving its dividend (yield of 5 percent). As such, the company should be able to garner investor confidence moving forward.

Lindsay added that revenue synergy opportunities from the Foster Wheeler deal is "gathering momentum," especially in the areas of LNG, petrochemical and brownfield, ad "notably" in the Middle East.

Finally, the analyst pointed out that the stock is currently trading at a valuation level that is almost 50 percent below its historical averages and offers "one of the most attractive" and "secure" dividend yields.

Other preferred plays consists of: Schlumberger Limited. SLB and UK-listed Petrofac Limited.

Halliburton Upgraded To Buy

Lindsay's lone upgrade consists of boosting shares of Halliburton Company HAL to Buy from Hold with a price target slightly lowered to $44 from a previous $45.

According to Lindsay, Halliburton's decremental margin performance in the first half of 2015 (even adjusting for the depreciation on assets held for sale) of 37 percent year-over-year and 34 percent sequentially was "much better" than the comparable period in 2009 which showed 66 percent and 47 percent declines year-over-year and sequentially.

Lindsay suggested that Halliburton's performance in the first half of the year was aided by more efficient operations with 85 percent of its fleet working 24/7, further fleet conversions to ‘Frac of the Future,' and good customer uptake of new technologies.

Looking forward, the analyst stated that the company's combination with Baker Hughes will at first present a "challenging" integration process but the synergy potential of the deal could "easily" exceed current guidance and prospects.