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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.
When the price of oil tumbles, it impacts nearly every part of the market. And everything in the oil industry has been getting hammered.
This includes oil equipment and service companies that provide technology, services and products for optimizing the extraction of oil.
Oil prices have tumbled some 20% over the last few months and some of the major oil and gas servicing companies are down as much as 20% in just the last 30 days.
While oil is down near $80 a barrel, the Energy Information Administration (EIA) still thinks oil prices will hover between $95 and $100 a barrel for 2015.
The smaller oil and gas companies might be less able to adapt to handle the price fluctuations, but the major oil equipment companies are global operators and call some of the major oil and gas companies their customers.
The industry leaders are being pressured for factors beyond their control, including the sanctions on Russia, a new war in Iraq and upheaval in Libya.
The other the reason for the decline in oil prices is the boom in shale production in states such as Texas and North Dakota, which has led to an oversupply of oil. However, the rush to tap into these shales is leading to a crowded drilling market, which should increase the demand for more efficient drilling equipment.
Ultimately, the selloff in oil and gas equipment companies is a big mistake that the market should come to realize in due time.
We’re big fans of overreactions. The overreactions in the major oil and gas equipment companies offer attractive entry points for the industry’s top four players:
Oil Industry Stock No. 1: Schlumberger Ltd. (NYSE: 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%.
Oil Industry Stock No. 2: Halliburton Co. (NYSE: 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.
Halliburton generates nearly 65% of its operating income from the North America. The key is that North America could be a key catalyst for the oil products company as the sanctions in Russia show no signs of waning. It also offers a 1.1% dividend yield.
Oil Industry Stock No. 3: Baker Hughes Inc. (NYSE: BHI)
Baker is another major manufacturer of products and technology for drilling. Its specialty is drilling bits. Shares have tumbled 22% over the last month and the company missed earnings earlier this month, putting even more pressure on the stock. However, the earnings miss was mainly weather-related.
Baker Hughes 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. The company trades at a hefty discount to its peers due to lower margins, but after working through some supply chain issues in the U.S., its margins should move higher.
The other interesting factor for Baker Hughes is that it’s not just the cheapest player in the industry, but it’s also expected to grow earnings at an impressive 34% annualized rate over the next five years. Compare that to market favorite Apple (NASDAQ: AAPL), which is expected to grow earnings at an 11.5% rate.
Oil Industry Stock No. 4: Weatherford International (NYSE: WFT)
Weatherford has a $12.7 billion market cap, making it the smallest of the four major oil servicers. It’s much like Halliburton in terms of its international exposure; about 60% of its operating income is generated from North America. Weatherford also has a strong presence in Canadian heavy oil.
Weatherford’s stock price is down 27% over the last month and 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 to major peers due to the high debt load it carries on its balance sheet. Its debt-to-capital ratio is the highest of the major players, coming in at nearly 50%. But the company’s key focus going forward is to reduce debt, and part of this will come thanks to planned divestitures. Weatherford plans to lowers its debt-to-capital ratio to 25% by the end of 2016.
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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