Morgan Stanley: Multiple Expansion Across Oilfield Services Sector Likely Amid Broadening Global Capex Upcycle

Visibility into a broadening global capex upcyle has increased, prompting Morgan Stanley to upgrade its industry view on the oilfield services sector from In-line to Attractive.

The Analyst

Analyst Connor Lynagh initiated coverage of 14 oilfield services stocks with the following ratings and price targets: 

Diversified Services

• Baker Hughes A GE Co BHGE: Overweight/$40
• Halliburton Company HAL: Overweight/$50
• Schlumberger Limited. SLB: Equal-weight/$72
• Weatherford International plc WFT: Equal-weight/$4

Small-Cap Services

• Core Laboratories N.V. CLB: Equal-weight/$125
• Covia Holdings Corp CVIA: Equal-weight/$11

Capital Equipment

• Cactus Inc WHD: Overweight/$42
• Forum Energy Technologies Inc FET: Equal-weight/$13
• National-Oilwell Varco, Inc. NOV: Equal-weight/$50
• Oil States International, Inc. OIS: Equal-weight/$35
• Dril-Quip, Inc. DRQ: Underweight/$50

• Offshore Drillers

• Transocean LTD RIG: Overweight/$15
• Diamond Offshore Drilling Inc DO: Underweight/$15
• Noble Corporation PLC NE: Underweight/$6

The Thesis

A coordinated global increase in upstream capex in 2020 is likely, potentially marking the first year of material positive growth since 2013, Lynagh said in a Tuesday note. (See his track record here.) 

The analyst said he expects multiple expansion across the oilfield services space as upstream operators around the globe increase their budgets in 2019 and 2020.

Lynagh recommends balanced exposure to major service verticals, citing the potential for long-term growth across most markets.

Among the group, the analyst sees the most favorable risk-reward in diversified services and land drillers and less favorable risk-reward in capital equipment. The risk-reward in small-cap services and offshore drillers fall somewhere in between, Lynagh said. 

Positive On Gas-, LNG-Oriented Equipment Companies

Morgan Stanley recommends Baker Hughes due to its distinctive gas- and LNG-oriented equipment offering, as gas and LNG development is likely to see higher growth globally than had been anticipated, with China specifically seeing significant demand growth. 

The sell-side firm acknowledged near-term risk in North America and is below the consensus expectations for 2018 for all heavily exposed names. That said, Lynagh said the valuation of Halliburton is compelling.

After the slackness in 2019, Lynagh expects U.S. capex to rebound in 2020. Ahead of a mid-to-late-2019 utilization trough, the analyst said he expects North America-levered stocks to rally.

Nabors, Transocean Among Top Small-Cap Picks

Morgan Stanley said it likes Transocean's near-term cash flow resiliency stemming from a "best-in-class" contract book, complemented by "significant bull case upside."

Nabors Industries Ltd. NBR's strong position in the U.S. and international onshore drilling markets gives it broad leverage to the cyclical recovery, Lynagh said. 

The Price Action

The iShares Dow Jones US Oil Equip. IEZ was up 1.06 percent at $35.19 at the close Wednesday. 

The SPDR S&P Oil & Gas Equipt & Servs. XES was up 1.36 percent at $16.38. 

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