Jefferies Warns Investors Against Yield Hunting In Oil Services

On a day when oil prices are down markedly, Jefferies warned investors from diving into oil services stocks looking for high yields.

Specifically, the analysts said that oil stocks like BP plc BP have suspended share repurchases in 2015, while other companies, Exxon Mobil Corporation XOM among them, have cut share repurchases.

This is a trend that Jefferies said will continue while these companies look to sure up balance sheets.

The analysts noted that they were more “surprised that the dividend is being tested this early in the price downturn.” Perhaps this is the best indication that oil stocks see a lower price for the medium-term.

Jefferies also stated that “valuations appear strained” while the oil companies are trading at a P/E of 14.8x, while the U.S. oil stocks are trading at 150 percent of the S&P 500’s FY15 expected P/E.

Jefferies broke down its top picks into two categories – defensive positioning and to gain leverage on oil price recovery. For defensive plays, it recommended Royal Dutch Shell plc (NYSE: RDS-A) and Occidental Petroleum Corporation OXY.

To anticipate an oil price recovery, it said BG Group plc BG, Chevron Corporation CVX, and Galp Energia SGPS SA GLPEF.