Investors have not yet woken up to the fact that energy is a growth business; our recommendations are in great shape to take advantage of a global oil and gas market where supply is likely to be chasing demand for years to come, points out Roger Conrad, editor of Energy and Income Advisor.

If you’re still light on energy stocks, you don’t want to wait any longer to build positions in high quality companies when they trade below our highest recommended entry points. In the oilfield services sector, we hold two companies in the model portfolio -- Baker Hughes (BKR) and SLB Ltd. (SLB), formerly called Schlumberger.

Both recently reported results and guidance reflecting a tight market where they’re on track to maximize results by focusing on their most profitable businesses.

During Baker’s earnings call, CEO Lorenzo Simonelli affirmed his company was still “on a path towards achieving full-year guidance and overcoming external volatility,” citing $2.7 billion orders booked in Q1 at the Industrial Energy Technology business excluding LNG. Those include major contracts with Aramco and Black & Veatch.

And the strength offset expected weakness in North America particularly in US natural gas basins, which management had warned about during the Q4 call earlier this year.

Simonelli was considerably more bullish longer-term, forecasting 20 percent higher global demand for natural gas by 2040 to spur Baker’s LNG business. And he forecast a 70 percent boost in the company’s installed capacity related to LNG worldwide, lifting that business’ current 10 percent share of EBITDA substantially in coming years.

Simonelli also stated the company “remains confident in achieving new unit energy orders between $800 million and $1 billion” for the rest of 2024, triple the level of 2021.” And he said the company is on track to reach a target of $6 to $7 billion in new energy orders in 2030.

Baker’s Q1 earnings before tax were higher by 21 percent on a 12 percent bump in revenue. The Middle East was 38 percent of sales and a primary driver, followed by North America (27 percent), Latin America (18 percent) and Eastern Europe/Africa at 17 percent.

Earnings per share were up roughly 50 percent. And the 11 percent dividend increase is right in line with management’s policy of paying out 60 to 80 percent of free cash flow to shareholders. That’s solid growth backed by a conservative strategy with a strong long-term outlook. And it makes Baker an undervalued, very high quality bet on the long-run cycle. Buy up to $40.

We’re equally bullish on SLB, despite a continuing challenge from unpaid bills at Mexican national oil company Pemex, which is now 12 percent of uncollected charges. Q1 revenue improved by 13 percent, EBITDA increased 15 percent and earnings per share were ahead by 19 percent.

As was the case with Baker, SLB more than offset a revenue decline in North America (-6 percent) with strong results elsewhere (up 18 percent). That’s also a trend management forecast earlier this year. And CEO Olivier Le Peuch noted 13 percent growth at all core business segments, including reservoir performance, well construction and production systems.

Results were good enough for SLB to promise to return $3 billion to shareholders in 2024 with an additional $4 billion in 2025. And he forecast further margin expansion due to “tight service and equipment capacity internationally, increased technology adoption and improved operational efficiency.” The company is also a major service provider to ExxonMobil’s (XOM) Guyana project and its extensive plans for output growth.

SLB has increased its annualized CAPEX by about $800 since 2020. Free cash flow, however, has grown far faster — by nearly $3 billion as cash from operations has more than doubled. And plans to return $7 billion to shareholders in dividends and buybacks through 2025 signal conservatism will rule for the foreseeable future, despite management’s bullish industry outlook. Buy at $60 or lower.

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