JPMorgan Sees Opportunity In Oil Services, Says M&A Will 'Take Backseat'

JPMorgan analyst Sean Meakim sees plenty of bargains for selective oil services investors, but avoiding the most troubled names in the space is critical. According to Meakim, most deep-water drillers remain dangerous investments at this point.

“Highly-levered offshore drillers in particular have mostly exhausted cost reductions and are now tapping the capital markets to avoid longer term cash flow hurdles,” Meakim explained.

“We expect equity raising to continue in the near term as companies take advantage of a more supportive oil price to ensure balance sheets can last through the downturn.”

Related Link: British Columbia Could Become A Major Oil Player

JPMorgan remains Underweight on ENSCO PLC ESV, Noble Corporation Ordinary Shares (UK) NE and Transocean LTD RIG.

Meakim believes most potential M&A buyers are likely still more concerned about the near-term health of their balance sheets than long-term growth. He feels the highly-anticipated M&A boom in the oil services space remains on the back burner for now.

A Few Long-Term Names

Despite the large number of companies struggling with balance sheet issues, JPMorgan believes the top companies make strong long-term investments at current prices. The firm names the following oil services stocks as top picks:

• Schlumberger Limited. SLB
• Halliburton Company HAL
• MRC Global Inc MRC
• Nabors Industries Ltd. NBR
• TETRA Technologies, Inc. TTI
• AMEC Foster Wheeler plc American Depositary Shares AMFW

Disclosure: The author is long SLB and HAL.