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Investing Topics: Oil-Field Services

Focus On The Permania

The latest additions to the Energy & Income Advisor Focus List have lagged of late, primarily because of the selloff in West Texas Intermediate crude oil. In light of these recent market moves, we we revisit our outlook and investment strategy.

Beyond The Big Four

The bullish case for US oil-field services hinges on accelerating drilling and completion activity helping to relieve the capacity overhang built up during the boom years, potentially setting the stage for a recovery in pricing.

Industry survivors with superior scale and balance sheets have an opportunity to take market share from smaller operators. Oil-field service companies have also slashed costs aggressively, providing earnings leverage to a recovery in volumes.

At the same time, investors must remember that many of these companies operate cyclical businesses and consider the extent to which current valuations have priced in any incremental upside in earnings.

Oil-Field Services and Equipment: Exercise Caution

Despite the recent rally in shares of oil-field service providers, our negative outlook for activity levels in the international market and skepticism regarding the timing and magnitude of a recovery in North America explains why we remain underweight oil-field services and capital equipment. Many of these stocks have rallied too far, too fast and don’t account for overcapacity that remains to be worked off from the boom years.

The View from the Oil-Field Services Industry

Schlumberger’s wide-ranging earnings calls have long provided investors with useful insights into bigger-picture trends and developments affecting the energy value chain, thanks to the firm’s forthright management team and the breadth of its oil-field service offerings. In these uncertain times, investors should heed CEO Paal Kibsgaard comments on the supply-demand balance in global oil markets and the various forces pushing and pulling crude prices.

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