Goldman Upgrades Oil Service Sector

Goldman says 'waiting for consensus estimates to bottom would likely result in missing most of the initial 50-60% rally.'
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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 considerableupside 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 thelast leg of negative revisions as investors gain confidence in oil prices andan early 2010 trough in earnings.

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

Goldman raised

Weatherford International

(WFT) - Get Report

and

Halliburton

(HAL) - Get Report

to buy from neutral on early-cycle growth potential, and lifted

Ensco

(ESV)

to buy from neutral.

Nabors

(NBR) - Get Report

and

Patterson UTI Energy

(PTEN) - Get Report

went to buy from neutral and

Helmerich & Payne

(HP) - Get Report

from sell to neutral.

BJ Services

(BJS)

went to neutral from sell;

Pride International

(PDE)

was cut to neutral.

Schlumberger

(SLB) - Get Report

and

Transocean

(RIG) - Get Report

were downgraded to neutral from buy, and

Diamond Offshore

(DO) - Get Report

went to sell from buy.

Noble

(NE) - Get Report

was taken off the conviction buy list.

"Conversations with investors also suggest that there is significantdemand 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 andinternational exposure and in to early cycle, higher-beta stocks. We recognize that many ofthe early cycle sub-sectors may have less leverage to the next up-cycle (relative to thepast) due to supply additions (e.g. land drilling, pressure pumping, jackups) but believethat there is still significant upside given current valuations (i.e. 100% upside as opposedto 200% upside in prior up-cycles)."