We recently compiled a list of the 10 Best Oilfield Services Stocks to Buy Now. In this article, we are going to take a look at where Valaris Limited (NYSE:VAL) stands against the other oilfield services stocks.
Brent crude oil prices have dropped below $80 per barrel from more than $90/bbl in April because of reduced demand for oil, growing worldwide stockpiles, and a decrease in geopolitical risks. In the first half of the year, prices were extremely volatile owing to rising geopolitical tensions, reductions in production by OPEC+ members, and indications of strengthening worldwide industrial production.
Global oil demand is decelerating, mirroring difficulties in the worldwide economic landscape, especially the reduction in China’s economic expansion. Amid the deceleration, oil prices finding support above the $70 barrel should be a boon for the oilfield service sector, which is highly dependent on oil and gas prices.
The oilfield and service sector is made up of companies that offer assistance to companies involved in the exploration and production of oil and gas. Consequently, the best oilfield services stocks to buy are of companies that assist in the production, repair, and upkeep of wells and drilling machinery. The companies receive multibillion-dollar contracts from integrated energy firms and independent and national oil and gas companies.
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When crude oil prices rise and remain well above the $70 barrel level, upstream companies’ ramp up spending on exploration and drilling activities, benefiting oilfield services companies. Increased spending translates to improved revenues and profit margins.
With oil prices finding support above the $70 per barrel level, the oilfield services sector should grow at a compound annual growth rate of 5.83% from $119 billion as of 2024. The robust growth is attributed to rising expectations of increased development of gas reserves and advanced technology.
While oil prices averaged $77 a barrel in 2023, persistently high inflation above 4% was one of the reasons that the oilfield services remained under pressure. That’s because upstream companies refrained from pursuing mega exploration and development projects.
Consequently, the overall oilfield service sector had a one-year return of −11.8%, underperforming the S&P 500, which was up by about 26%. The sector is down by about 3.87% for the year, underperforming the S&P 500, which is up by about 17%.
While the underperformance is a concern, it provides an ideal entry-level for the best oilfield services stocks to buy now, as most appear to be trading at a discounted valuation.
The global upstream industry is expected to maintain its hydrocarbon investment at about $580 billion in 2024, representing an 11% year-over-year increase. Likewise, the expected investments should make the case for investors to pay close watch to the best oilfield services stocks to buy now, trading at discounted valuations.
The second quarter showed growing momentum across different verticals in the oilfield services sector amid a slowdown in U.S. activity.
“The four major oilfield service companies are well-positioned to benefit from the multi-year global upcycle in E&P spending and the increasing demand for energy services and technology,” Evercore analyst James West wrote. “Strong earnings growth and margin expansion are being driven by international and offshore markets.”
Our Methodology
We used Yahoo Finance’s Screener to compile the list of the best oilfield services stocks to buy now. We scanned for the most significant oil & gas equipment & services companies and those with a substantial upside potential based on analysts’ average price targets. Once we had a consolidated list, we selected and ranked the stocks based on their upside potential.
We also mentioned the number of hedge funds that had bought these stocks during the same filing period. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A closeup of an offshore oil rig in the international oil and gas industry in the Gulf of Mexico.
Valaris Limited (NYSE:VAL)
Hedge Funds Holding Stakes: 39
Stock Upside Potential as of 12/08/2024: 45.22%
Valaris Limited (NYSE:VAL) is an oilfield company that provides offshore contract drilling services. It owns an offshore drilling rig fleet that includes drill ships and dynamically positioned semi-submersible rigs. It is a company that contains fire from all angles regarding operational efficiency. It operates a fleet of 52 rigs, including 36 offshore jackup rigs, 11 drillships, and 5 semi-submersible platform drilling rigs.
The company’s financial health is also noteworthy. Valaris Limited (NYSE:VAL) ‘s revenue efficiency in Q2 stood at 99%, with revenues increasing to $610 million from $525 million a year ago. Net income quadrupled to $26 million from $151 million a year ago. The company continues to record booming business, securing a $500 million contract backlog with Equinor offshore Brazil.
While Valaris Limited (NYSE:VAL) is down by about 4%, it trades at a discount. Analysts on Wall Street rate the stock as a Buy with a $94 price target, implying a 45.22% upside potential from current levels.
39 out of 920 hedge funds tracked by Insider Monkey held stakes in Valaris Limited (NYSE:VAL) as of the end of Q2 2024.
In its Q2 2024 investor letter, Praetorian Capital shared insights on Valaris Limited (NYSE:VAL):
“Valaris Limited (NYSE:VAL) has been range bound for over two years now, awaiting the signing of new contracts at current market rates, that will replace expiring contracts that are frequently less than half of current prevailing rates. There have been some questions as to why the company has been slow to sign new contracts. However, I believe that management is trying to trade a slightly reduced price for increased duration of contract tenure, and that’s the reason for a lack of commentary on new contracts. Should the company announce new contracts at anywhere near current market rates, I believe that the shares will respond in a rather dramatic way—especially as Valaris is by far the cheapest of the large drilling companies (based on the enterprise value per rig metric), despite having one of the best fleets and strongest balance sheets. Between our common and warrant position, Valaris was our 2nd largest position at the end of June.
Overall VAL ranks 7th in our list of the best oilfield services stocks to buy. While we acknowledge the potential of VAL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than VAL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.