Goldman's Slick On Oil: Reinstates Coverage On Halliburton And Baker Hughes, Maintains Buy On Schlumberger

Goldman Sachs’ Waqar Syed said that although some investors expect the large caps to exhibit lower earnings power in the current cycle versus the prior one, due to structurally lower E&P capex, the large caps are likely to be able to preserve their earnings power with significant cost cuts.

Analyst Waqar Syed added that while some considered large cap service valuations as fair, “when compared to those at a similar point in time in the 2009-2014 cycle,” he believes higher valuations are warranted since “the 2016 cyclical trough is much worse than the 2009 trough, while earnings in 2019/2020 will likely be similar to 2014 levels due to cost cuts.”

Syed projected EPS and EBITDA CAGR of 148 percent and 22 percent, respectively for the 2009-2020 period, up from 18 percent and 17 percent for the 2009-2014 cycle.

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Halliburton

The analyst reinstated coverage of Halliburton Company HAL with a Buy rating and a price target of $46. He wrote, “We favor HAL as a cyclical play which we believe should benefit from a rebound in pressure pumping (PP) activity in 2017.”

Syed expressed optimism regarding the PP business, since profitability seemed to be at a cyclical bottom and 30-40 percent capacity had exited the market. Halliburton had gained 3 percent market share during the downcycle, and currently had 27 percent total share, backed by its scale, logistical network and advanced equipment.

“We believe it should benefit from cost advantages during the upcoming upcycle,” the Goldman Sachs report added.

Baker Hughes

Syed reinstated coverage of Baker Hughes Incorporated BHI with a Neutral rating and a price target of $47.50. Shares had outperformed the OSX by 6.7 percent since April 6, when the DOJ announced opposition to its deal with Halliburton.

Schlumberger

The analyst maintained a Buy rating for Schlumberger Limited. SLB, while raising the price target from $82 to $94. He mentioned that the company has best-in-class financial, operational and technical reach, which was further strengthened by the merger with Cameron International Corporation CAM.

“SLB is well-positioned to meet the changing customer needs in the New Oil Order, which should lead to market share gains,” Syed commented.