Oil Services: Perfect Storm Creates Buys

10/28/2014 7:00 am EST

Focus: STOCKS

Marshall Hargrave

Contributing Editor, Wyatt Investment Research

Sometimes the market overreacts, which can provide great buying opportunities. It looks like the major selloff in oil has made one industry too cheap to ignore, suggests Marshall Hargrave in Daily Profit.

Everything oil-related has been getting hammered, including companies that provide technology, services, and products for optimizing the extraction of oil.

The overreactions in the major oil and gas equipment companies offer attractive entry points for the industry's top four players:

Schlumberger Ltd. (SLB)

This oil and gas equipment maker is the industry leader with a $122 billion market cap. It employs some 120,000 workers across 85 countries. Schlumberger is trading at a forward P/E ratio (price-to-earnings ratio based on next year's earnings estimates) of just 14. The company's five-year average P/E ratio is over 21.

The other enticing aspect of Schlumberger is that it has one of the best balance sheets in the industry, with a debt-to-equity ratio of 33%. Schlumberger also offers the highest dividend yield of the major oil and equipment product companies, coming in at 1.7%.

Halliburton (HAL)

Halliburton is the second-largest oil and equipment maker, with a $45 billion market cap. Both Schlumberger and Halliburton should be big benefactors of the rise of offshore fracking.

However, the big difference for Halliburton is that it's a major player in the North American market, generating nearly 65% of its operating income from North America. It also offers a 1.1% dividend yield.

Baker Hughes (BHI)

Baker's specialty is drilling bits. The stock tumbled 22% over the last month and is the cheapest of the oil equipment companies. Its forward P/E is just 9.7 and its price-to-book (P/B) ratio is 1.3.

It trades at a hefty discount to its peers due to lower margins, but after working through some supply chain issues, its margins should move higher. Meanwhile, it's also expected to grow earnings at an impressive 34% annualized rate over the next five years.

Weatherford International (WFT)

Weatherford has a $12.7 billion market cap, making it the smallest of the four major oil servicers. About 60% of its operating income is generated from North America. Weatherford also has a strong presence in Canadian heavy oil.

The stock trades at a forward P/E of 9.7. But the company is expected to grow earnings at an impressive 30.5% over the next five years, according to Wall Street analysts.

It trades at a hefty discount due to the high debt load—its debt-to-capital ratio is the highest of the major players—coming in at nearly 50%. But the key focus going forward is to reduce debt, in part, due to planned divestitures.

A perfect storm of bad news and turmoil has put the entire oil industry in upheaval. However, oil demand is still expected to climb in 2015, 2016, and 2017, meaning there will be a need for more oil production.

The companies that make extracting the precious commodity easier and more efficient were great investments before the selloff. Now they are even more attractive to investors.

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