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Sterne Agee Analysts Expect Oil Service Stocks To Continue Underperform


A Sterne Agee report is cutting estimates and price targets on energy production firms and expects oil service stocks to continue to underperform the market near term.  The lowering of performance estimates comes as the research report notes a 450+ rig count decline in the U.S. market by mid 2015, lowering their 2015 U.S. rig count to 1,560 from 1,950. On an international basis, a slowing rig count is evident, but not as severe as in the U.S. The report cuts its international rig count forecast to 1,365 from 1,450.

Oil Rig Count

Sterne Agee oil analysts Stephen D. Gengaro and Ivan Suleiman think Oil will remain in the low $60s for several months before recovering to the $70s in the second half of 2015.

The report says oil service stocks are likely to underperform the broader markets over the next few months as crude oil prices search for a bottom.  The advice is not to abandon long term positions in the sector, but rather to stick with high quality names, such as Sterne Agee’s favorite picks Schlumberger Limited. (NYSE:SLB) on the large cap side and Oil States International, Inc. (NYSE:OIS) on the smaller cap side.

Oil Rig Count

How will investors know when the bottom in oil prices has been put in?

 

Decline in oil rig activity

The Sterne Agee report highlighted a few key developments that might signal a turnaround in prices. This included stabilization in crude oil prices, a slowdown in the rate of decline in rig activity, and visibility on 2015 earnings.

Oil Rig Count

Picking a top or bottom in any market is anything but an exact science, particularly in Oil when behind the scenes maneuvers by Saudi Arabia, who, as reported in ValueWalk months ago, was said to want to eliminate the economic viability of the U.S. oil production industry while also weakening Iran and Russia in the process, a move said to be backed by the U.S. State Department.

“While obviously not an exact science, we believe that one of the keys to “finding a bottom” on oil service names will be a deceleration in the rate of decline in the rig count,” the report said.

Rig Count

Rig Count

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