What happened

Shares of ProPetro Holding Corp (NYSE:PUMP) slumped about 10% by 2:30 p.m. EDT on Thursday after an analyst trimmed the Permian Basin-focused oil service company's price target.

So what

The Permian Basin has been a hotbed of drilling activities over the past few years, which has been a boon to oil services companies like ProPetro since it provides hydraulic fracturing and other services to oil companies focused on the region. That fast-paced growth enabled ProPetro to recently report record second-quarter results, with revenue jumping 19% from the first quarter while EBITDA surged 25%.

Oil workers at a drilling site.

Image source: Getty Images.

However, the region has been growing so fast that oil producers are on pace to exceed its pipeline capacity in a matter of months. While several new lines are under development, drillers have already started slowing down. ConocoPhillips (NYSE:COP) and Noble Energy (NASDAQ:NBL) were among several producers that recently announced plans to reallocate some of their drilling activities to other regions. In ConocoPhillips' case, it plans to drill more wells in the Eagle Ford shale, while Noble Energy will likely allocate more capital to Eagle Ford and the DJ Basin.

Because of this situation, an analyst at SunTrust lowered the bank's price target on ProPetro Holding Corp. from $28 to $24 a share due to the view that well completions in the Permian will slow for the rest of this year and into early 2019. While the bank kept its buy rating on ProPetro's stock since it anticipates that its profitability will hold up better than its peers', the near-term outlook isn't as bullish as it once was.

Now what

While small niche oil service companies like ProPetro can deliver outsized gains during boom times, their lack of diversification can come back to bite them when market conditions soften. That's why investors are better off considering larger oilfield service stocks, since they offer strong upside potential during up markets with less risk that a localized issue will have a notable impact on their operations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.