Morgan Stanley Issues a Buy for Oil Field Service Stocks Because of Depressed Valuation

by | Apr 5, 2019

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The global energy market is missing the international opportunity for oil services, given the misconception of equating global spending with international oil companies (IOCs) and US E&P capital discipline. That’s according to a recent report by Morgan Stanley. Yet national oil companies (NOCs) represent more of global spending and are growing. Morgan Stanley recommends a buy in oil field service (OFS) stocks on depressed valuation/sentiment. It’s top pick: TechnipFMC.

“We see the market missing the international opportunity for Oil Services, given the misconception of equating global spending with IOC and US E&P capital discipline,” the report authors write. “Yet NOCs represent more of global spending and are growing. Buy OFS on depressed valuation/sentiment. Top pick: TechnipFMC.”

Other market predictions and highlight from the report include:

The myth of flat capex: We see equity markets mistakenly equating the ‘capital discipline’/ flat capex message from the majority of western public companies (e.g. European Majors and US E&P guidance) as indicative of global spending.

Overly bearish Oil Services view priced in: Global Oil Services EV/EBITDA multiples are at, or below, midcycle levels and close to P/BV support levels. This suggests the market is reflecting little improvement in activity or profitability/returns, which is consistent with the market’s view of stagnant industry spending. US and European oil field service (OFS) stocks have fallen ~60% vs Brent oil prices -38% and underperformed respective markets by 121%/56%.

Industry spending is growing: International upstream spending started rebounding in 2018, and we expect it to accelerate, adding >$100 billion to global spend by 2022. Most of this opportunity is outside of shale, highlighting the opportunity in international markets. We also see growing evidence of international recovery across Offshore, MENA and LNG markets. Improving demand fundamentals support our positive views on stocks exposed to the Oil & Gas supply chain.

Driven by the forgotten money of capex: Our new analysis highlights that national oil company directed spending is twice that of international oil companies, at 33% of global upstream, and we expect this segment to grow above the industry pace in coming years. We also see growth from internationally focused E&Ps and certain IOCs, e.g. Exxon.

Significant upside opportunity as market prepares for lift off: We see the market as yet to embrace this cyclical outlook, although investor interest is growing (28% YTD rally in oil prices helps). Previous cycles suggest that multiple expansion from midcycle to peak levels delivers ~30% upside. Further upside is generated by earnings upgrades, especially from operating gearing (see 2017 ‘Phases’ note and 2018 reiteration). This is consistent with the average ~40% upside to our global basket of Overweights for this theme (~100% to Bull cases). This includes TechnipFMC, Tenaris, BHGE, Transocean, Borr Drilling, Petrofac, Saipem, Subsea 7, Sembcorp Marine, Samsung Engineering, Larsen & Toubro, Hilong, JGC, Nabors and Modec.We raise forecasts and price targets for TechnipFMC, Petrofac, Saipem. Subsea 7 and Hilong.

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