2 Big Falling Knives in the Energy Market

NEW YORK ( TheStreet) -- Here's a curious irony about the energy market: The greatest threat to the future growth of the U.S. solar market is sustained low natural gas prices, which continue to hit fresh decade lows this week.

Every day of $2.25 natural gas spot prices or below is another day to expect natural gas power plants to replace the dying coal plant fleet, and that makes for a tougher case when utilities need to argue in support of solar power deployment.

Yet right now, both oil service, the stock sector most reliant on the North American gas drilling for its recent growth, and the solar sector, share one very important thing in common: They are among the sharpest falling knives in the energy market. Investors might be better off steering clear of both sectors, even if it seems that a bottom has to be reached soon, or has already been reached, in both cases.

The margin pressure in the North American drilling market has been the worst-kept secret on Wall Street since late in 2011. It's what sent Halliburton ( HAL) to a 52-week low last October, and yet, when Baker Hughes ( BHI) said late last week that North American margins would be way down, and Schlumberger ( SLB) began this week saying something similar and added that low natural gas prices will not rebound any time soon, it was perceived as "news."

This "news" led many to revisit the old argument that Schlumberger, which has the highest international weighting, is the oil service name to own, with the least exposure to the rolling over in the North American market. Halliburton may be well run, but can't avoid the pain, while Baker Hughes, in citing weak margins, shows a combination or market-wide woes and company-specific execution problems.

In any event, Schlumberger shares are down 10% in the last five days, which tells you all you need to know about the conventional wisdom. Consider this: Guggenheim Securities analyst Michael LaMotte, who rates Halliburton at neutral, has a $43 price target on the stock. Halliburton shares were below $33 on Wednesday.

The message is pretty plain: Oil service stocks may offer great long-term value, but they are the best buys in the stock market that no one wants to own. The issue is visibility on the extent of the pain in the U.S. drilling market, as drilling companies pull out of dry gas basins -- the Haynesville rig count now down 55% year over year.

The market is pricing in a doomsday scenario because it can't be ruled out. Investors understand that these companies just don't have the visibility on all the ramifications of low gas prices, with equipment moving around all over to better economic basins for drilling and down time for rigs, utilization moving lower and less cost absorption. Everyone knows margins will be hit, but the fact that Schlumberger could not provide specific guidelines shows that they may feel some of the pain remains better left unquantified.

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