For the past three years, oil & gas services stocks have been the last place investors have looked when considering potential investments. However, with oil & gas capex spending expected to increase this year for the first time since 2014, by 2.5% to $455bn, it could be time to revisit the oil services sector ahead of a rebound in profitability.
Indeed, since 2014, oil service providers have slashed costs to keep the lights on, and while this has had the desired effect, when volume returns to the market, a lower cost base should also accelerate profitability growth — great news for long-suffering investors.
Under-appreciated
Over the past year shares in Petrofac (LSE: PFC) have gone nowhere, just like the company’s revenue. Profits have slipped from a high of $630m in 2013 to a loss of $350m for full-year 2015. Analysts expect this trend to reverse for 2016 with a profit of $312m pencilled-in for the year, on revenue up 10% year-on-year.
This could just be the start of Petrofac’s recovery. City earnings figures for 2017 are based on current projections from Petrofac’s backlog. If there’s a sudden uptick in demand for the company’s services, earnings growth will exceed expectations. Analysts are already forecasting earnings per share growth of 21% during 2017. Based on this earnings target the shares are trading at a forward P/E of 9.8. Such a low multiple indicates investors don’t expect much from the company. If business is better than expected, the shares could quickly re-rate higher.
The market also seems to believe that the future is bleak for Amec Foster Wheeler (LSE: AMFW). Based on current City forecasts the shares trade at a 2018 P/E of 8.9. In the boom times, the shares traded at an average P/E of around 12.5. Just like Petrofac, shares in Amec will see a double boost of earnings growth and multiple growth if oil services demand picks up over the next few years.
Also, after acquiring Foster Wheeler several years ago, Amec’s revenue is actually higher today than it was back in 2013, despite the downturn. With this being the case, if the group’s profit margins return to boom-time levels, profits surge to new highs. Certainly one company to keep an eye on over the next few years.
The future is bright
Shares in Hunting (LSE: HTG) have risen 93% over the past 12 months, but despite these gains, the shares could have further to run if oil services spending picks up again.
Hunting is not expected to report a profit for the next two years. However, these City forecasts seem at odds with figures from the ground which show activity in Hunting’s primary market, the US, picking up with higher oil prices. A sustained rise in oil prices will help maintain this momentum and City forecasts in Hunting will likely be revised higher as a result. At present shares in the company are trading at a relatively undemanding price-to-book ratio of 1.1.
