U.S. oil rigs have come online a bit more quickly than some analysts expected in the third quarter, and with the momentum, industry followers anticipate an upward trend for stocks in the industry to continue.
Stephens Inc. analyst Matthew Marietta wrote in an Aug. 30 report that the firm now models a 15% quarter-over-quarter rig count increase in the third quarter versus its previous estimate of a 5% to 7% uptick.
When commodity prices began falling in 2014, U.S. land operators were quickest to respond, according to Deutsche Bank analyst Mike Urban, substantially cutting spending and shifting operations to low-cost plays when possible.
Urban wrote in a Tuesday report that this rapid movement caused an 80% decline in the U.S. rig count from October 2014 to May 2016.
But the U.S. land market also was the first to bottom, and thus it has rebounded 25% off the bottom, while the oil price has nearly doubled and seemingly stabilized, he said.
And OFS stocks have held up surprisingly well this past month despite what Jefferies analysts Brad Handler and Eduardo Royes the call bearish near term influences on oil.
The third quarter rig momentum may stand to improve that performance near-term.
As such, Stephens' Marietta has raised his near-term price target on six oilfield service providers: Baker Hughes, Schlumberger (SLB) - Get Report, Halliburton (HAL) - Get Report, Superior Energy Services (SPN) , U.S.Silica Holdings (SLCA) - Get Report, and Flotek Industries (FTK) - Get Report.
Among these players, Stephens' sees Flotek and Superior Energy as the top U.S. land-exposed small and mid-cap stocks, since sentiment toward U.S. land remains positive versus the very negative outlook for anything offshore.
Marietta warns, though, that underweight stocks, including U.S. Silica, which has performed well in the past few months, continue to carry some risks.
Schlumberger continues to be Stephens' top large cap pick, as the firm remains more defensive into third quarter reporting.
Conversely, Deutsche Bank's Urban pegs Halliburton as the firm's favorite mid-cap oilfield services stock, but agrees with Stephens that Superior Energy is among the best mid-cap options due to the company's leverage to production.
"In a more modest recovery scenario, we believe operators may focus more on production from existing assets in addition to completing previously drilled wells, which would benefit pressure pumping and well service companies," he wrote Tuesday.
Meanwhile, Jefferies analysts Handler and Royes also named Halliburton, Superior Energy and U.S. Silica among their top stock picks in the industry in a Tuesday report.
In order, the firms sees Halliburton, as well as Hi-Crush Partners (HCLP) , Patterson-UTI Energy (PTEN) - Get Report, Superior Energy and U.S. Silica as the top performers for the next nine to 12 months.
Still, Stephens' Marietta is weary of the industry on a whole in the fourth quarter, writing Tuesday that activity increases in the third quarter could result in a flat to down in the fourth quarter versus the previous frame.
The analyst said persisting oil price volatility and a recent breakdown in crude under $50 per barrel could shift activity and motivation of some operators.
TheStreet pointed out in early August that the rig count tends to lag major booms and busts in oil prices by as much as a quarter, and Stephens' wrote Tuesday that early September will mark 90 days from crude's most recent fall below $50.