Goldman Upgrades Oil Service Sector

Source:

"Waiting for consensus estimates to bottom would likely result in missing most of the initial 50% - 60% rally. . ."

The oil service sector was upgraded from neutral to attractive Tuesday by Goldman Sachs.

"We recognize that the OSX [Oil Service Index] is well off of the low but see considerable upside as we progress through the commodity-driven phase of the cycle, which is likely to be driven by multiple expansion," wrote analyst Daniel Boyd. "While we are 23% below consensus EPS for 2010, we expect the stocks to look through the last leg of negative revisions as investors gain confidence in oil prices and an early 2010 trough in earnings.

"Waiting for consensus estimates to bottom would likely result in missing most of the initial 50% - 60% rally - as was the case in 2002. We remain confident in our 2010 oil price forecast of $70/bbl [per barrel] and our natural gas price forecast of $6.50/MMbtu [thousand British thermal units]."

"Conversations with investors also suggest that there is significant demand for energy stocks; however, many are waiting on the sidelines hoping for a pullback," Boyd wrote. "We would recommend buying on any pullback.

"We are rotating out of stocks with more defensive characteristics such as deepwater and international exposure and in to early cycle, higher-beta stocks. We recognize that many of the early cycle subsectors may have less leverage to the next up-cycle (relative to the past) due to supply additions (e.g. land drilling, pressure pumping, jackups) but believe that there is still significant upside given current valuations (i.e., 100% upside as opposed to 200% upside in prior up-cycles)."

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