Yogi Bera would remind us that it is difficult to make predictions, especially about the future – and that pearl of wisdom is more relevant than ever in today’s oil markets. As a rough proxy for the price of crude oil, gasoline prices at the pump rebounded this summer, and are now starting to rebound. The latest upward pressure on oil came from Saudi Arabia, which announced a 2 million barrel per day cut in OPEC production.
But that was only one factor. Most of the oil market is being pushed around by unpredictable forces, and OPEC’s role is hardly the biggest. The Middle East is chronically unstable, with unrest in Iran and ongoing conflicts in Iraq and Syria; Western nations are sanctioning Russia in response to the invasion of Ukraine; Supply chain issues, including tanker availability, continue to affect trade patterns; and the global economy, facing recessionary pressures, is increasingly vulnerable to high inflation, which is largely driven by energy prices.
It’s enough to make your head spin. But if you try to predict where prices will go, it’s better to bet than to bet right now. Global demand for fossil fuels, particularly oil and gas, continues to be strong – and as long as this continues, there will continue to be upward pressure on oil prices.
For investors, a sector with increasing product price potential presents an opportunity – the companies that will be able to gain as prices rise. And right now, looking at the oil industry for investment firm BTIG, analyst Gregory Lewis sees just such an opening in the oilfield services companies (OFS). These are businesses that offer support to the exploration & production and drilling companies – everything from drilling technology to waste water removal to specialized engineering expertise in pumps and piping.
In Lewis’ view, the oilfield service firms can offer investors over 40% upside for the coming year. We’ve pulled up the latest data from TipRanks on two of his picks; combined with Lewis’ comments, that data may shed light on where those companies are headed.
Helix Energy Solutions Group (HLX)
Our first oilfield services company has a niche in a specialized sector – Helix focuses on offshore activities, offering support through the entire lifecycle of offshore oil and gas fields. Helix’s services include subsea robotics, well intervention, subsea trenching and cable burial, and seabed cleanup activities. Although Helix has historically worked with the hydrocarbon industry, in recent years the company has expanded its services to reach the offshore renewable energy segment.
Helix organizes its operations by both business area and geography. The company’s segments include well intervention, robotics, and production facilities; geographically, the company operates in deep water in the Gulf of Mexico and the North Sea, as well as Brazil, West Africa, and the Asia-Pacific region.
The company earlier this week reported its 3Q22 financial results, and it showed a sharp increase in top-line revenue. For the quarter ended September 30, Helix had revenue of $272.55 million, up 50% year over year and a significant 67% sequentially. For the first three quarters of the year, Helix reported more than $585 million in total revenue, for a y/y gain of 15%. Helix reported a diluted EPS loss of 12 cents per share in Q3, a fairly flat result from the 13-cent loss reported in the year-ago quarter, and well above the 20-cent EPS loss reported in Q2.
In his coverage of this stock, analyst Lewis notes the strength of the industry behind Helix, writing: “We are at the beginning of the current peak cycle for offshore O&G services that appears to be tightening faster than usual due to overlapping demand from offshore wind.”
“Our assumption is that HLX will be able to benefit from a cyclical recovery in OFS over the next few years with additional tailwinds coming from the global build-out of offshore wind,” said Lewis.
With this bullish stance in mind, Lewis upgrades HLX from Neutral to Buy, and sets a $10 price target that suggests a 44% upside on the one-year time frame. (To see Lewis’ track record, Click here)
Lewis is hardly the only bull when it comes to Helix; This stock has 4 recent analyst reviews on file, all of which are positive – for a unanimous consensus rating of Strong Buy. Shares in Helix are priced at $6.94 and their average target price of $8 suggests a 15% upside for the next year. (See HLX stock analysis on TipRanks)
Transocean Ltd. is (RIG)
We will continue our look at oil field services with Transocean, the world’s leading contractor for offshore drilling services on oil and gas wells. Transocean’s particular specialty is drilling services in ultra-deep and harsh environments; the company has operations outside the continental shelf in the Gulf of Mexico, for example. Transocean’s fleet of drilling rigs – which it owns or has partial ownership interests in – consists of 37 mobile offshore units. These include 27 ultra deep water floats and 10 harsh environment floats. The company is working to expand its fleet by building two ultra-deepwater drillships.
In the four quarters from 2Q21 to 1Q22, Transocean saw its top line revenue slide and earnings losses grow deeper – but that trend appears to have ended, and 2Q22 saw better news for the company. At the top line, the second quarter brought in revenue of $692 million, up 18% from 1Q22. Year on year, Q2 revenue was up 5.5%. On the bottom line, the company’s net loss for 2Q22 was 10 cents per diluted share. This compares favorably to the diluted EPS loss of 26 cents of 1Q22, and to the 18-cent net loss per share of 2Q21.
Transocean ended Q2 this year with $2.28 billion in total assets, including $729 million in cash. The company’s net cash from operations came in at $40 million. Although this is down significantly from the $249 million of the quarter ago, it is a strong turnaround from the $1 million cash loss reported in the previous quarter. Transocean’s total unrestricted cash and cash equivalents were reported at $1.16 billion as of June 30.
In an important metric that bodes well for Transocean’s future, the company has a contract backlog — that is, work contracted for but not yet started — of $6.2 billion.
Checking in again with BTIG’s Gregory Lewis, we see that he sees Transocean in a good place to start improving its financial results. Noting “improving day rates in the floater market,” Lewis goes on to explain that “the company will be allowed to recharter its rigs at higher levels.” The analyst continued, “We note that Norwegian semis are also starting to tick up (a key part of RIG’s fleet). Refinancing opportunities for RIG to improve its balance sheet.”
To that end, Lewis rates RIG a Buy with an $8 price target, indicating a potential 118% upside over the next 12 months.
Overall, this deepwater oilfield services firm has received 7 reviews from Street analysts, including 4 Buys, 2 Holds, and a Single Sell, giving the stock a Moderate Buy consensus rating. The shares have an average target of $5.22, suggesting an upside of ~43% from the trading price of $3.66. (See RIG stock analysis on TipRanks)
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Denial: The views expressed in this article are solely those of the analysts in question. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.