Analyst Upgrades Oil Services Stocks, Predicts 'Doubling Of US Rig Activity'

This year has been a historically brutal year for oil stocks, with a pricing war between Russia and Saudi Arabia coupled with COVID-19 travel restrictions pushing WTI crude oil prices briefly into negative territory for the first time in history.

However, the oil market has since stabilized, and one analyst said Thursday it may finally be time for investors to start dipping their toes in the oil services space.

The Analyst

Bank of America analyst Chase Mulvehill issued ratings and price target updates throughout the oil services group, including the following upgrades:

Liberty Oilfield Services Inc LBRT upgraded from Neutral to Buy, price target raised from $5.50 to $7.50.
Helix Energy Solutions Group Inc HLX upgraded from Neutral to Buy, price target raised from $2 to $4.
Helmerich & Payne, Inc. HP upgraded from Underperform to Buy, price target raised from $15 to 23.
Cactus Inc WHD upgraded from Underperform to Neutral, price target raised from $16 to $21.

The Thesis

Even after rallying more than 54% from the March lows, Mulvehill said the oil services group remains down 58% year to date and nearly 80% from the beginning of 2018. Given this aggressive long-term sell-off, he said oil services stocks have significant upside remaining from current levels.

“Our less cautious view of the sector comes on the heels of a less dire outlook for global oil inventories during 2021, thus setting up for less aggressive US Shale production declines that likely leads to a doubling of US rig activity by YE21,” Mulvehill wrote in the note.

While the entire group will benefit from a better-than-feared recovery, he said stock selection will be critical and oil services stocks with high exposure to the US should benefit sooner than others.

Mulvehill said Liberty Oilfield is his top stock pick among the four upgrades mentioned above. He also reiterated a Buy rating for Baker Hughes Co BKR and raised his price target from $17 to $21, saying Baker Hughes is the only oil services stock that has the potential to return to prior cycle peak EBITDA.

Benzinga’s Take

The more optimistic outlook for oil services is certainly good news for investors. Unfortunately, analysts have painted a bullish picture for this group of stocks for years now, but each rally has ultimately fizzled out and each downturn has been more severe than the last.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.