Oil Services Rally Getting Tired, JPMorgan Warns

Oil investors have cheered the more than 50 percent surge in WTI crude prices off of multi-year lows earlier this year, but a new report by J.P. Morgan analyst Sean Meakim urges oil services investors to remain cautious in the near-term. According to Meakim, much of the recent surge has been short covering, and crude will likely not maintain its momentum for much longer.

“A (sustained) oil price rally is a predicate for any improvement in oil services fundamentals, and history indicates a 1-2 quarter lag in E&P activity is likely (therefore pushing the recovery to 2017), though we suspect the market could be trying to anticipate the ramp now,” Meakim explains.

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In the meantime, he expects more negative earnings revisions in the space through 2018.
J.P. Morgan recommends that investors stick to high-quality large cap stocks.

Overall, Meakim believes that it is still too early to get too bullish about oil services stocks and recommends that traders sell into the strength of the recent rally.

Although J.P. Morgan remains defensive in the space, Meakim names several top stock picks for more eager investors.
Meakim names Overweight-rated Halliburton Company HAL and Schlumberger Limited SLB as its top two stock picks. He also mentions MRC Global Inc MRC, Nabors Industries Ltd. NBR, Superior Energy Services, Inc. SPN and TETRA Technologies, Inc TTI as preferred small cap names.

Disclosure: the author is long HAL and SLB.