Initiating coverage of the Energy Services sector
Waqar Syed, MBA 720-683-6705
Generating positive investment returns in energy services has been a difficult proposition of late, as rising shale well productivity has pressured commodity prices and reduced energy service take on a secular basis. E&P talk of parent-child well intervention and other recent datapoints indicate that we may be in the latter stage of the well productivity improvement cycle, the end of which may herald a positive upcycle for energy services, although the exact timing of inflection is still difficult to determine. In the meantime, owing to macroeconomic concerns weighing on investor minds, we recommend a barbell approach to stock picking in the energy services space. Our Outperform ratings are heavily weighted towards defensive stocks in the context of energy services, which we characterize as those with: (a) a high and safe dividend yield (SLB/HP); (b) a strong balance sheet; and, (c) significant exposure to secular themes like LNG (FTI/BHGE). We take selective beta (higher risk) bets with ESI, PD, and TCW, who offer leverage to the Canadian market, which we believe could see stronger activity growth in 2020e than the US/International markets. While we are negative on US pumping given market oversupply, equipment obsolescence risk, and macro risks, we recommend PUMP and LBRT, as they are profit leaders in the industry and could lead the next phase of innovation/transformation in a sector that badly needs a new type of pumping hardware. We view consensus 2020 estimates to be high, which could be an overhang on the group.
Highlighting our Barbell Approach to Energy Service Investing
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