What are we looking for?
North American oil-field services stocks poised to benefit from stabilizing world oil prices.
On Nov. 30, OPEC members reached a new agreement to reduce oil production levels by 1.2 million barrels a day. Since then, the price of crude oil has rallied about 1 per cent, leading to sharp advances in the stock prices of oil producers. However, the advance has been even more dramatic in the prices of oil-field services stocks, an industry that has suffered the past two years under the burden of low oil prices.
The screen
We will be using Recognia Strategy Builder to identify North American oil-field services stocks with low debt and reasonable valuations despite rallying strongly in the past month.
We begin by setting a minimum market capitalization threshold of $1-billion. We wish to focus on larger capitalization companies because of the greater stability and safety that they offer. We will consider both U.S. and Canadian listed stocks.
Debt is an issue for many companies in the energy sector after the low oil prices of the past two years. We will seek only companies with modest debt levels, specifically a debt-to-equity ratio of 1.0 or less. We will also look for companies whose stock prices have responded well to the recent good news and have rallied at least 10 per cent in the past four weeks. Last, to ensure we are buying companies with reasonable valuations, we will screen for stocks with price-to-sales ratios of 2.5 or less.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trade ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Topping our list is Transocean Partners LLC (RIGP), an offshoot of oil-services giant Transocean, which owns and operates three ultradeep water drilling rigs in the Gulf of Mexico. Parent company Transocean currently owns 49 per cent of the common shares. Transocean Partners' stock has seen a 46-per-cent jump in the past month on speculation of increased drilling activity by U.S. energy companies.
Further propelling the stock price is a pending acquisition offer by Transocean for the remaining shares in the company.
Oil-services giant Baker Hughes Inc. (BKI) is the largest company on our list with a market cap in excess of $28-billion (U.S.). Since hitting a 52-week low in January, Baker Hughes's stock has rallied strongly and is now up over 40 per cent year-to-date, including a 12-per-cent surge in the last four weeks.
In early November, GE announced it would merge its oil and gas operations with Baker Hughes creating the second largest player in the oil services sector.
Calgary-based Canadian Energy Services Ltd. (CEU) is one of two Canadian-listed companies to make our list. The company's principal businesses are drilling fluids and chemicals for the energy industry. The stock is up more than 32 per cent in the past four weeks, capping a great run since the spring. The stock is now up 85 per cent year to date.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.