(Energy stock, oil services story updated for Thursday market close)

NEW YORK ( TheStreet) -- Energy stocks were again leading the Street on Thursday and new 52-week highs for some stocks in the sector continued to be the rule -- and, in particular, for the oil service sector stocks.

Whether it's Halliburton ( HAL), Baker Hughes ( BHI) , Schlumberger ( SLB) or Weatherford International ( WFT), oil service stocks are sitting at or near 52-week high levels attained this week; all four companies hit new intraday 52-week highs on Thursday, before ending the day slightly lower.

Between rising crude oil prices, recent road-showing from the oil service companies (including last week's Credit Suisse energy conference), a U.S. drilling market that continues to defy reports of a peak being reach, and the continued unrest in the Middle East, oil service stocks have been a big part of the equities rally in 2011, doubling the returns of the S&P 500 year-to-date.

It's all the energy stocks moving up, though -- among the integrated oil majors ConocoPhillips ( COP) hit a new intra-day high on Thursday. Yet the oil service stocks make a good group from which to consider if energy stocks are vulnerable to a pullback.

David Havens, analyst at Sterne Agee, notes that the PHLX Oil Service Sector Index has not had one pullback since September -- after a five-year period during which pullbacks have been typical -- therefore, the OSX chart suggests that a pullback from current levels would not be surprising.

Indeed, it all raises the question: Are the oil service stocks priced for perfection at this point -- meaning any signs of weakness and they sell off -- or is there yet another economically justified, and sector fundamentals-supported, leg up in these stocks in 2011?

Alan Laws, analyst at BMO Capital Markets, argues that oil service stocks are not "priced for perfection" and that there is still earnings growth left in these stocks. The BMO analyst admits that "it's not a stoic group of stocks," so there is always risk of a pullback, especially given the surge, but he is more inclined to see potential for sideways trading, a pause as opposed to a leg down, awaiting a raised Street outlook for 2012 that won't come until the mid-year 2011 point.

There are several ways to look at this question. What follows are some of the key points for investors to consider.
  • Are you a trader or in for the long-haul with oil service stocks?
  • This is an important distinction for analysts in the sector, who argue that the sector fundamentals support models headed higher, but this may not occur immediately. Waiting for the 2012 and 2013 numbers to go higher could be too long a wait for some investors.

    Sterne Agee's Havens says that the U.S. outperformance continues to support stocks, but it needs to continue and there needs to be international market improvement, not just in volume but in pricing. And that may take some time yet. These data points, especially pricing power in international markets, may push upside Street revisions to the numbers further out.

    BMO Capital's Laws says there is still an up cycle trade in these stocks. "One can argue we are due for a pause here or a pullback, but that's if you are a trader, and even they will start adding to positions again if brent crude heads back to the $90s. But if you are not concerned about tomorrow, these stocks will be higher six months from now. It's the pace that makes people nervous, but in six months you are buying on the 2012 numbers anyway. The overall cycle is multi-year," Laws says.
  • Are there stock price triggers for a pullback?
  • The Sterne Agee analyst provided a quick snapshot of what could be sensitivity levels for share prices in oil service stocks:

    Halliburton ended trading at $48.43 on Thursday and hit an intraday 52-week high of $48.8. Havens says that Halliburton reached a share price in the low to mid-$50s (his price target is $55) and investors will reassess earnings expectations. "I fully expect better numbers in 2012 and 2013, but is the Street too far ahead? We know the improvement is coming, but some of it is built into these stocks already," Havens says.

    Schlumberger ended trading at $94.37 on Thursday, after hitting an intraday high of $94.92. The Sterne Agee analyst thinks that anywhere near the $100 mark and investors will be looking for more specific data on the earnings side to be comfortable with the trading multiple. Schlumberger will be holding its annual analyst day next week, though it's not clear whether Schlumberger will present any specific information regarding the international market activity recovery which could serve as a trigger for shares.

    For Baker Hughes, closing at $71.19 on Thursday, after an intraday high of $71.29, the Sterne Agee analyst thinks the "pause and reconsider" share price could be $72.

    "I can't see why numbers need to come up yet, unless all the concerns about the international market pricing recovery being further along are wrong. Yet the management teams in the sector have been clear about the international situation," Havens notes.

    The Sterne Agee analyst added, "Schlumberger will be as supportive of international at next week's analyst day as they were in their earnings conference call. Activity is coming back, but they still have to deal with contracts signed during the financial crisis. It's volume improvement without pricing strength."

    Therefore, any negative surprises relative to margin improvement on the international side and these stocks would be vulnerable.
  • What are the potential surprises amid the general sector cycle?
  • Middle East disruptions are a good example of the type of exogenous risk that is distinct from the oil service sector fundamentals story. Currently, the Middle east unrest has clearly helped these stocks as they trade linked to the price of crude oil. However, these companies are highly exposed to Middle East service activity, as well as in Northern African oil markets like Algeria. Any disruptions caused by the political unrest and earnings will be impacted.

    "The recent performance is now in the First Call numbers, and the numbers have come up nicely and rapidly, but this means earnings expectations and prices are high and need these companies need to make sure they execute. These stocks are not conditioned for mistakes at these levels," Havens says.

    -- Written by Eric Rosenbaum from New York.

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