Oil services: A trio of favorites

by Elliott Gue, contributing editor Personal Finance

Energy stocks are now at their cheapest levels since late 2008, when oil prices fell from a multiyear high of about $150 per barrel.

Either oil prices are headed for a 2008-style collapse, or energy-related stocks are a screaming bargain and could double in value over the next 12 to 18 months. The latter scenario is far more likely.

Oil-services firms perform a variety of functions related to exploring for new fields, drilling wells and optimizing production. Here's three of our favorites in the oil services sector.

Weatherford International (WFT) specializes in services that enhance production from older, mature wells.

Its operations in the North American oilfield services market has been strong for more than two years, thanks to robust activity in unconventional oil and natural-gas fields such as the Bakken Shale of North Dakota and the Marcellus Shale in Appalachia.

In the second quarter, management indicated that companies in North America are boosting budgets to squeeze more oil from their older fields. As demand strengthens, Weatherford has hiked the prices it charges.

International oil and gas projects are sensitive to Brent crude oil prices, which are close to record highs; activity is unlikely to weaken in the near term.

Concerns about an accounting restatement earlier this year were overblown and have already been priced into the stock. Trading at a price-to-sales level that’s roughly half the industry average, Weatherford is a buy under 28.

Contract drillers such as SeaDrill (SDRL) own drilling rigs and lease that equipment to oil and gas producers in exchange for a daily fee.

SeaDrill owns a fleet of 14 operating deepwater drilling rigs and had five rigs under construction in shipyards. All the company’s operating rigs are contracted under long-term deals for fixed, attractive day-rates; the total value of these contracts exceeds $8 billion.

Deepwater drilling activity shows no sign of slowing outside the US, and producers anticipate a gradual return of activity in the Gulf of Mexico.

SeaDrill owns the newest and most advanced fleet of deepwater rigs in the world; its equipment is in high demand and earns above-average day-rates.

Far too much has been made of SeaDrill’s debt burden. With 88 percent of its outstanding debt maturing after 2014, the company’s near-term refinancing needs are limited.

Many of these loans are also secured by liens on deepwater rigs, which lowers the company’s borrowing costs. Yielding almost 10 percent, SeaDrill’s shares rate a buy up to 38.

EOG Resources (EOG) holds significant acreage in some of North America’s largest shale oil and gas fields.

With natural-gas prices in the tank and oil prices surging, the company has directed about 80 percent of its $7 billion capital budget toward boosting oil output in 2011 and 2012.

Management expects the firm’s oil production to jump 52 percent in 2011 and 30 percent in 2012.

The company will open a new unloading facility with 100,000 barrels per day of capacity in Louisiana in early 2012. The standard crude benchmark at that facility is Louisiana Light Sweet, which currently fetches almost $30 per barrel more than West Texas Intermediate.

On a price-to-earnings and price-to-sales basis, EOG currently trades at its lowest valuation since late 2009, when oil prices were significantly lower. Buy EOG under 125.

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