Oil Service Stocks: The Best Buys Nobody Wants
NEW YORK ( TheStreet) -- If margins in the North America oil service business aren't quite falling off a cliff, how much closer to the edge will they come in the first quarter?
That's the question that Halliburton(HAL) faces when it reports its first-quarter results on Wednesday.
The extremely fluid nature of the North American drilling market suggests a clear answer -- one that's good enough to put all of the market fears to rest -- is likely to elude Halliburton management once again.
In its fourth-quarter report, Halliburton made the concession the market was waiting for. Management of the oil service company most exposed to the North American pressure pumping market said margins would decline further, but they wouldn't go over a cliff. It was a qualitative guidance comment given after the company delivered margins of 27% for its North American business, the lowest level in two years.
The oil service stock trade has been driven by negative sentiment ever since, and that's the way it's likely to remain barring a clear-cut, quantifiable answer from Halliburton.
Michael Marino, analyst at Stephens, said, "I think that is the biggest issue with anyone tied to pressure pumping. No one can define the bottom and I am not sure Q1 results are going to help that. This is why we remain EW
Oil service stocks might deserve to be designated as a value buy at these levels -- a position staked out by many analysts on Wall Street -- but even if that is the right long-term investing logic, it doesn't mean the stock responds to that logic this week.
Consider that Schlumberger(SLB) , which is the least exposed to the North American pressure pumping business among the largest oil service companies, has headed straight down in the oil service basket trade, regardless of its international tilt as deep water drilling fundamentals improve.
Halliburton's North American margins were 29% in the second and third quarter of 2011 before declining to 27% last time around. Two years ago, in the fourth quarter of 2009, the company's margins were in the single digits. One year ago, Halliburton margins were 25%. The cycle went from bust to boom and is now coming off the boom, but by how much?
The 25% margin might represent the line in the sand. If Halliburton North American margins hold that line, shares are likely to do little worse than stay flat. However, if Halliburton margins slip below 25% this quarter, it's likely to stoke fears that the cyclical downturn far from finished.
Demand for drilling services remains high, but the price decline in natural gas has resulted in a raft of questions that can't be easily answered.