Morgan Stanley Sees 'Large Rebound' For Oil Spending In 2017

• Morgan Stanley has reduced its upstream oil spending targets for 2015 and 2016.
• The firm sees an inflection point in spending coming in 2016 and a large rebound in 2017.
• Morgan Stanley sees upside potential from current prices for patient shareholders of many oil services and drilling stocks.

Morgan Stanley is once again slashing its forecast for upstream spending in the oil industry. However, despite the pricing weakness, analyst Ole Slorer believes that risk in many oil services and drilling equipment stocks is currently skewed to the upside.

New Numbers

Morgan Stanley is now projecting global well-related spending to fall 26 percent in 2015 and 3 percent in 2016. North America is by far the weakest global market, and the firm is calling for a 42 percent decline in North American Spending in 2015. The Middle East/Africa is the most resilient market, as Morgan Stanley projects only a 9 percent decline in spending in 2015.

Patience Rewarded

The good news for shareholders is that Slorer sees a “large rebound” in spending in 2017. As the spending cycle once again hits its upswing, Morgan Stanley is calling for a 7.5 percent rebound in spending in 2017.

“We see a crude market inflection point occurring in 2016, as incremental global supply undershoots incremental global demand on the back of U.S. unconventional production declines and slowing production growth from Saudi Arabia and Iraq,” Slorer explained.

Stock Picks

Morgan Stanley currently has Overweight ratings on the stocks of a large number of oil services and drilling companies, including Schlumberger Limited. SLB, Halliburton Company HAL and Baker Hughes Incorporated BHI.

Based on the firm’s price targets, Morgan Stanley currently sees the most upside to Overweight-rated Fairmount Santrol Holdings Inc FMSA, Seventy Seven Energy Inc SSE, Pacific Drilling SA PACD and C&J Energy Services, Ltd. CJS.

Disclosure: the author owns shares of Schlumberger and Halliburton.