Morgan Stanley Upgrades Superior Energy, Downgrades RPC, Helmerich & Payne

Morgan Stanley’s Ole Slorer said that companies with pristine balance sheets had significantly outperformed onshore service peers, which made their risk-rewards less favorable, while there seems to be better value in companies with similar business exposures with and slightly higher, albeit manageable, risks.

Highest Quality Operators To Underperform

North America onshore is likely to lead the recovery, as is widely expected, with meaningful increases in capital spending by upstream operators as oil prices recover, analyst Ole Slorer mentioned. He added, however, that the "highest quality" operators in the region would likely underperform.

Too Much, Too Soon

Slorer downgraded Helmerich & Payne, Inc. HP from Equal-Weight to Underweight, while raising the price target from $50 to $55. He downgraded RPC, Inc. RES from Overweight to Equal-Weight, while maintaining the price target at $15.

The analyst mentioned that both companies are extremely high quality operators with nearly debt-free balance sheets. However, their stocks had significantly outperformed the sector year-to-date, “to a point where valuations relative to peers look less attractive, in our view.”

“We are gaining increasing conviction that a sector rebound is approaching and would anticipate the highest quality onshore operators will be some of the weakest performers vs. the sector given their relative resilience since the peak of the cycle and YTD,” Slorer wrote.

Much Better Risk-Reward

Morgan Stanley maintained an Overweight rating for Nabors Industries Ltd. NBR, while raising the price target from $12 to $13. The rating for Superior Energy Services, Inc. SPN has been raised from Equal-Weight to Overweight, with price target up from $13.50 to $15.

Although there is higher risk in both companies, they have substantial liquidity and potential for cash flow neutrality even if the current downcycle were to persist longer than expected. While there are some near-term negative catalysts for Superior Energy, these seems “relatively priced-in and manageable,” the analyst said. He added that Nabors had “an optically high debt load but a significant amount of liquidity that should see it through the trough.”