Investment banking firm B. Riley FBR has released a report on the state of the US oil industry, and sees room for growth in the sector. This optimistic outlook is based on several factors, but most importantly, the firm’s view that oil stocks are in a rally and that the US rig count, which has been declining in 2019 due to the current low-price regime, has troughed. If B. Riley is correct, then the oil industry in the US will see an upturn in 2020, and oil stocks will rise accordingly.
That said, the firm has several stock recommendations for investors interested in buying into the oil boom. But these recommendations might not be quite what you expect – they aren’t drilling companies, but rather the oilfield support companies that drill operators rely on to provide the ancillary services – drillhead maintenance, well activation, pipeline and tanker facilities – required to keep up extraction activities and move the product. After all, while oil prices are low, a barrel of crude has no value if it can’t make it to market.
Analyst Tom Curran led the team that authored the report, and he focused on low-cost stocks in the support segment of the oil industry. This is where he sees the best potential for upside in oil investments – and that upside can exceed 25% in the coming months. We’ve used TipRanks’ Stock Screener tool to further sort Curran’s list of champs, and find three with Strong Buy consensus ratings and great prospects for mid-term growth. Let’s take a closer look:
Liberty Oilfield Services (LBRT)
Liberty, a small-cap player in the industry, supports the fracking segment of oil operations. The company supplies engineers, piping equipment, water, sand, and chemicals needed to maintain hydraulic fracking – the technology that revitalized American oil and started the current energy boom in the first place.
It’s a high-overhead niche, as fracking tech involves high-cost equipment and personnel, and 2019’s drop in oil prices hurt Liberty. In Q3, the most recent reported, the company showed revenues of $515 million, 1.3% below the forecast, and EPS of 15 cents, 44% below expectations. Both numbers were down year-over-year, too.
The poor report pushed share prices down in early November, but LBRT has since recovered and is now trading up 18.6% since the quarterly release. Investors should note that Liberty, like many companies in the energy sector, pays out a dividend – and that the divided of 5 cents is easily sustainable at current EPS levels. The yield of 1.8% is slightly below average, however.
Curran sees plenty of reason to buy into LBRT. In his review of the stock, he writes, “LBRT’s… liquidity-rich balance sheet, with a net cash position set to soar higher on robust 2020 FCF generation and attractive valuation make it our favorite pressure pumper… we estimate that LBRT is trading at 2020 FCF yield of 15%…” He sets a $16 dollar price target on the stock, showing both the shares’ affordable cost of entry and 43% upside potential. (To watch Curran’s track record, click here)
Liberty’s Strong Buy consensus rating backed by 7 recent reviews, which include 6 Buys. The average price target, $14.07, indicates a 28% growth potential in the coming 12 months, making the $11 current trading price a bargain. (See Liberty stock analysis at TipRanks)
Select Energy Services (WTTR)
Select Energy, another small-cap energy company like Liberty above, inhabits the fracking support niche. Select offers a full range of services in the water, chemical, and wellsite segments of the fracking industry. The company’s services include fluid sourcing and transport, water storage, filtering, and treatment, chemical technology and sourcing, and drill, crane, and pipeline logistics.
WTTR shares fell by 49% in 2019, but combined with a strong upside and improving quarterly numbers, the stock represents a bargain for investors. The quarterly numbers, reported in early November, were down year-over-year, but showed sequential gains from Q2 2019. Revenues were up 2% to $329 million, gross profits rose 2.7% to $41 million, and operations generated cash flow of $67.5 million. Select was able to complete the purchase of competitor Baker Hughes’ well chemical services for $10.4 million during the quarter. Added to a modest increase in gross margins, to 12.5%, Q3 2019 was strong for WTTR.
Riley’s Curran is upbeat on WTTR, despite the drop in share price during the year. Writing at the time of the quarterly release, he said of the company, “For the first nine months of 2019, the company has generated FCF of $65.0M, which already meets the floor of management’s full-year 2019 guidance… In addition, WTTR further pruned its 2019 capex budget; made a shrewd, strategically cogent bolt-on; repurchased stock; and exited 3Q with no debt and $43M in cash… WTTR’s ability to achieve such impressive results reinforces our core thesis that this is the best platform in one of the fundamentally healthiest OFS niches…” Curran’s price target, $15, indicates a robust upside of 61%.
WTTR shares finished 2019 on a high note, gaining 20.6% in December’s trading. The stock holds a Strong Buy consensus rating, based on 4 Buys and 1 Hold set in the last 2 months. Shares sell for just $9.28, but the average price target of $11.03 suggests an upside of 18.8%. While lower than Curran’s outlook, this average still indicates a strong chance for gains in the near-term. (See Select Energy stock analysis at TipRanks)
Solaris Oilfield Infrastructure (SOI)
Like the other companies on this list, Solaris provides the products and services that oil production companies required to conduct fracking operations. Solaris offers sand silos and rail-to-truck transfer systems that increase efficiency in shale oil plays in the United States. Formed in 2014, most of Solaris’ operations are in Texas and the surrounding states of Louisiana, Oklahoma, and New Mexico, but the company also has operations in Colorado, North Dakota, Ohio, and West Virginia.
Solaris saw strong earnings in Q3 2019, its most recent reported. EPS came in at 37 cents, based on a net income of $17.7 million. The company saw net cash for the quarter’s operations of $31.1 million, and a positive free cash flow of $26.9 million. It was an upbeat report, reflecting 2H19’s gains in an otherwise difficult year.
The solid cash position gave SOI confidence to pay out its 10-cent quarterly dividend for Q3, and raise that payment to 11 cents for Q4. The annual yield, 3%, is 50% higher than the S&P average, making SOI shares not just a low-cost-of-entry bargain, but also a better cash return than bonds.
Curran sets out a simple buying proposition on SOI, writing, “We believe the company’s solid results for a very tough quarter; highly FCF generative model and prudent balance sheet stewardship, with a resultant swelling cash position (10% of market valuation); and ongoing last mile logistics leadership… all support why it’s one of our preferred names.” He puts a $16 price target on the stock, implying an upside of 14%. (To watch Curran’s track record, click here)
Solaris has the lowest upside potential of the stocks in this list, at just 9%, but the Strong Buy analyst consensus, based on 7 Buy ratings given in the last two months, is unanimous. Wall Street’s views this as a stock that’s bottomed out, and is ready to start growing. Shares are trading for $14, and the average price target is $15.36. (See Solaris Oilfield stock analysis at TipRanks)