Updated on August 31st, 2021 by Bob Ciura
Oilfield services companies were significantly affected by the downturn in the oil market last year as a result of the coronavirus pandemic. As the price of oil plunged, many oil producers drastically reduced their production and postponed their growth projects. Consequently, the oilfield services companies experienced a major hit.
However, thanks to the steady economic recovery, demand for oil has improved. In turn, the price of oil has nearly doubled in the past year, and currently sits near $70 per barrel in the United States.
The large oilfield services companies are now in the early phases of what could be a multi-year recovery, assuming continued economic growth and rising demand for oil.
In this article, we will compare the expected 5-year returns of the three biggest dividend-paying oilfield services stocks: Schlumberger (SLB), Halliburton (HAL), and Baker Hughes Company (BKR).
All three oilfield services stocks pay dividends to shareholders, and can be found on our list of 294 dividend-paying energy stocks.
We will calculate their expected returns by summing their expected earnings-per-share growth, their dividend and their expected annualized expansion or contraction of their price-to-earnings ratio. This data is from the Sure Analysis Research Database.
Table of Contents
The 3 major dividend-paying oilfield services stocks are ranked below, according to their 5-year expected total annual returns, in order of lowest to highest.
You can jump to any specific section of the article by clicking on the links below:
- Oilfield Services Stock #3: Schlumberger (SLB)
- Oilfield Services Stock #2: Baker Hughes Company (BKR)
- Oilfield Services Stock #1: Halliburton (HAL)
- Final Thoughts
Oilfield Service Dividend Stock #3: Schlumberger (SLB)
- 5-year expected annual returns: 1.9%
Schlumberger is the world’s leading provider of oilfield services. It provides technology and services for oil and gas
exploration and production (E&P). The company has activity in more than 120 countries.
In late July, Schlumberger reported (7/23/21) financial results for the second quarter of fiscal 2021. Revenue grew 8% sequentially thanks to a significant increase in the active rig count, both in the U.S. and international markets.
The company enjoyed growth in all its divisions and thus it posted its highest sequential revenue growth in the last four years. As a result, adjusted earnings–per–share improved 43% sequentially, from $0.21 to $0.30, and exceeded analysts’ consensus by $0.04.
Schlumberger expects a continued recovery for the oil industry.
Source: Investor Presentation
Schlumberger was greatly affected by the pandemic and the resultant collapse of drilling activity last year. However, we expect the energy market to recover this year. On the other hand, there is a secular shift of oil producers to tighten budgets.
In addition, there have been great technological advances in oil production in recent years. As a result, producers are now able to extract more oil from a given number of producing wells. In other words, oilfield services providers are victims of their own success.
We prefer to be cautious in our growth assumptions and do not expect Schlumberger to return to its record earnings anytime soon. Overall, we expect Schlumberger to grow its earnings–per–share by 7.0% per year on average, from a mid–cycle level of $1.45, which is the 5–year average of the company.
Shares trade for a 2021 P/E of 25.6, above our fair value estimate of 14. A declining P/E multiple could reduce annual returns significantly over the next five years. Expected EPS growth of 7% per year plus the 1.8% dividend yield result in total expected returns of 1.9% per year over the next five years. We rate SLB a sell due to its overvaluation.
Oilfield Service Dividend Stock #2: Baker Hughes Company (BKR)
- 5-year expected annual returns: 3.9%
Baker Hughes has operations in more than 120 countries, and provides integrated oilfield products, services and digital solutions. On October 17th, 2019, Baker Hughes changed its ticker symbol from BHGE to BKR. The change of the name followed the reduction of the stake of General Electric (GE) in the company below 50% (to 36.8%).
On July 29th, 2020, General Electric announced that it will sell its whole stake in Baker Hughes over the next three years in order to reduce its debt load.
Today, the company offers a diversified suite of oilfield services.
Source: Investor Presentation
In 2020, the oilfield services segment of Baker Hughes generated 49% of its total revenues while the segments of oilfield equipment, turbomachinery & process solutions, and digital solutions generated 14%, 28%, and 9% of total revenues, respectively.
In late July, Baker Hughes reported (7/21/21) financial results for the second quarter of fiscal 2021. The company finally began to recover from the pandemic. Its orders of $5.1 billion grew 4% Y/Y while its revenue of $5.1 billion rose 9% Y/Y.
As a result, the company switched from an adjusted loss–per–share of –$0.05 to adjusted earnings–per–share of $0.10. Notably Baker Hughes performed worse than its peer Halliburton for a third consecutive quarter, as the latter is recovering faster from the pandemic. However, we expect Baker Hughes to gain momentum in the upcoming quarters.
Major technological advances have made it possible to produce more oil with fewer operating rigs. In essence, providers of oilfield services and equipment have been victims of their own success. This helps explain the markedly weak recovery of the results of Baker Hughes amid all–time high global and U.S. oil production in 2018–2019.
However, we expect the pandemic to subside and the energy market to recover in the second half of this year. The return of the U.S. and global oil production to their long–term growth trajectories will provide a tailwind to the business results of Baker Hughes in the upcoming years.
Moreover, a major growth driver could be the increasing demand from LNG projects. Overall, we expect Baker Hughes to grow its earnings–per–share at a 13.0% average annual rate over the next five years off this year’s low comparison base.
The stock is currently trading at a P/E ratio above 30, while we maintain a fair value estimate of 16.7, which is equal to the 10-year average P/E multiple. Overvaluation is expected to have a negative impact on the stock.
Even with expected EPS growth of 13% and the 3.2% dividend yield, total returns are estimated at 3.9% per year over the next five years. BKR is a hold due to its modest total return projection.
Oilfield Services Stock #1: Halliburton (HAL)
- 5-year expected annual returns: 5.9%
Founded in 1919, Halliburton is one of the world’s largest providers of products and services to the energy industry. It has operations in more than 70 countries and generates 53% of its total revenues in North America.
In 2020, its Completion and Production segment generated 54% of its total revenues and 64% of its operating income whereas its Drilling and Evaluation segment generated 46% of its revenues and 36% of its operating income.
The company has a massive global footprint.
Source: Investor Presentation
In mid–July, Halliburton reported (7/20/21) financial results for the second quarter of fiscal 2021. The report was very similar to the previous one. Revenue grew 7% sequentially thanks to 12% growth in North America and 4% growth in international markets.
The Completion and Production division posted 3–year high margins while Drilling and Evaluation performed better than expected. As a result, the company grew its earnings–per–share from $0.19 in the previous quarter to $0.26 and exceeded the analysts’ consensus by $0.03.
Halliburton maintained its positive outlook and stated its confidence that it has entered a multi–year growth cycle in North America.
Drilling activity has begun to recover thanks to the massive distribution of vaccines worldwide. As a result, we expect Halliburton to improve its earnings this year, though we do not expect it to return to its pre–2015 earnings anytime soon due to the increased efficiency of oil producers and their sustained focus on tight budgets.
Overall, we expect the company to earn approximately $1.80 per share by 2026, growing its earnings–per–share by 14.9% annually off this year’s expected earnings–per–share of $0.90.
Shares trade for a 2021 P/E ratio of 22.3, above our fair value estimate of 13, which we have applied due to the company’s volatile history and cyclical nature of the industry. The stock has a 0.9% dividend yield, and we expect nearly 15% annual EPS growth. Total returns are expected at nearly 6% per year over the next five years for Halliburton stock, making the stock a hold.
Final Thoughts
Due to the multiple downturns in oil market over the past decade, oilfield services stocks have dramatically under-performed the market. However, the industry has improved in 2021 thanks to the recovery from the pandemic and the gradual reopening of the economy. Oil demand has returned to the market, and in turn, the oil price is back near $70 per barrel in the United States.
If supply and demand forces remain favorable to the price of oil, and the economy stays out of recession, the oilfield services stocks could be in the early phases of a multiyear recovery.
Investors should keep in mind that these stocks are highly cyclical, and are vulnerable to recessions and downturns in the oil market. All the above stocks saw their earnings collapse in the Great Recession, and in the recent oil market downturn. Therefore, they should be viewed as highly cyclical.
