Investors have gone sour on oil services companies. Halliburton Co. , for one, has lost a third of its value in six months. Yet, capital spending by big energy groups, which becomes revenue for service providers, is set to rise 10 per cent to a record $600-billion (U.S.) in 2012, according to a Barclays Capital survey – even if oil prices decline. With that in mind, it's hard to justify the sector's low multiples.
The decline in Halliburton's stock was matched by rival Baker Hughes Inc. in the second half of 2012. Meanwhile, Schlumberger Ltd. , the world's largest oil services company, is down 20 per cent. Schlumberger now trades at a valuation of just 13 times forecast earnings in 2012, half its five-year average P/E ratio; Halliburton's equivalent multiple is just seven times.
One explanation could be that oil services companies are in the doldrums. Yet, this has been a banner year, and 2012 is shaping up better. With oil prices hovering around $100 a barrel, energy groups such as Exxon Mobil Corp. have been intensifying their quest for new hydrocarbon reserves. This means more business for services companies, which provide the rigs and drilling expertise. Earnings per share are on track to rise 30 per cent in 2012 at Schlumberger and Halliburton, according to Argus Research. That's partly thanks to capex from the energy majors.
Another reason for low forward valuation multiples might be the fear that Europe's crisis could spoil the party, with economic fallout denting the price of oil. Yet, crude producers told Barclays Capital that the price would have to fall toward $70 a barrel to provoke cuts in their capital spending plans. And Exxon Mobil and Chevron Corp. shares are flat over the past six months. That suggests investors consider a dramatic slide in the crude price unlikely.
In short, investors have punished oil services stocks but left the black stuff itself and big energy groups more or less alone in recent months. And bullish earnings estimates for services firms tally with the capex ambitions of their biggest customers. If that wasn't the case, it would be easier to explain away the sector's low valuation multiples. As it is, oil services companies look underappreciated by the market.