The oilfield services industry is in a supercycle that has yet to play out. However, the Q1 results aligned with expectations and failed to spur individual names to new highs. The takeaway is that these stocks are trending higher, and the pullback in price action is an attractive entry into the sector. Low valuations and attractive dividends are among the drivers for shareholder value. Other drivers are sustained double-digit business growth, widening margins, and solid support from analysts.

Oilfield Services Have Value: There is Value Within the Oilfield Services

[content-module:CompanyOverview|NYSE:HAL]The oil industry and oil-field services tend to trade at a discount to the broad market, providing a cheaper alternative relative to earnings power than other investments. Shares of SLB (NYSE: SLB), Baker Hughes (NASDAQ: BKR), and Halliburton (NYSE: HAL) trade in a range of 11X to 13X earnings compared to the highly valued S&P 500, which is trading closer to 20X in mid-2024. The group also provides better-than-average returns, with yields running from 1.7% (above the S&P 500 average) to 2.5%, and all distributions are growing. 

Within the group, Halliburton provides the deepest value at 11X earnings, suggesting it may see a price-multiple expansion over the next year or two. Its dividend is the low end of the range but the safest regarding the payout ratio. Halliburton’s payout ratio is nearly 20% of this year’s earnings, with earnings growth in the forecast, so future increases are all but assured. Baker Hughes has the highest yield at 2.5%, and even it is a safe and reliable yield based on the payout ratio of about 45%. A 45% payout ratio leaves plenty of room to grow the payout over time. 

The Q1 Results Were Uninspiring: Analysts View the Group as Undervalued

Results from the oilfield services giants were lackluster regarding the analysts' forecasts, but there are mitigating factors. The first is that analysts’ forecasts were inflated after several years of outperformance from the group. The second is that as-expected results include double-digit top-line growth from two of the three, growth from all, and solid, if not widening, margins. The news didn’t spark many upgrades or upward revisions from analysts but did not alter the bullish sentiment. 

[content-module:CompanyOverview|NASDAQ:BKR]These stocks are rated Moderate Buy or Buy and trade below the analysts’ lowest targets. Halliburton has the smallest minimum upside relative to its analysts' target range, about 6%, while SLB is looking at an 8% gain and Baker Hughes 10%. The consensus figures are more appealing and forecast a 25% upside for Baker Hughes and Halliburton and a 40% upside for SLB. The consensus for each is up compared to last year and steady over the previous 90 days, which is unlikely to change without a change in the outlook. 

[content-module:CompanyOverview|NYSE:SLB]Institutional holdings are strong. Institutions own 80% or more of these stocks and have bought on balance for the last year. This trend is expected to continue until the end of the oilfield supercycle. 

The Oilfield Supercycle Rolls On

The oilfield supercycle is driven by a decade of underinvestment by oil majors compounded by the shift to greener operations. The net result is increased CAPEX focused on efficiency, modernization, green(er) technology, development of new wells, and exploration. This means that Q2 2024 is expected to be another quarter of growth for oilfield services. 

Revenue gains in Q2 will run from 3.4% for Halliburton to 12% for SLB, including margin strength for all. Baker Hughes is forecast to have the strongest earnings growth, nearly 25%, and the forecast for next year is for these companies to sustain or accelerate growth from current levels. The Q2 results could be a solid catalyst for this group. The analysts forecast growth and earnings strength but have lowered targets sufficiently to allow outperformance.