Most oil stocks have taken a pounding as WTI crude oil prices slipped from above $50/bbl in late June to under $40/bbl this week. However, Citigroup analyst Scott Gruber reiterated the firm’s bullish thesis on large cap oil services stocks.
According to Gruber, Citi’s original call three months ago that integrated services stocks would outperform SMID names may have been too early, but it’s not wrong.
“This reflects the ability of Big Service to grow earnings through 4q without reliance on activity growth given internal cost cutting,” Gruber explains.
He believes there is a real risk that the recent drop in crude prices could shut down rig count recovery throughout the second half of the year, a trend that would be bad news for SMID stocks.
The businesses of the large integrated services companies are in much better shape than those of their SMID peers. Gruber notes that Schlumberger Limited. SLB 1.01% and Baker Hughes Incorporated BHI 0.04% will have robust share buybacks through the end of the year. In addition, the integrated services companies will see improving short-term and long-term FCF, and the stocks trade at much more appealing valuations than SMID names.
Gruber names…
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