Oil prices, which rallied for much of 2018, hit a brick wall in October and have come crashing down. That sell-off in the oil market took the stock prices of oil-related companies down with it, including oilfield service giants Baker Hughes (BKR 3.39%) and Schlumberger (SLB 3.98%), which have tumbled 31% and 42%, respectively, so far this year.
While both oilfield service stocks are now much lower, Schlumberger stands out as having a higher probability of outperforming the market over the next year. Here's what makes it a better buy over its rival.
The bull and bear case for Schlumberger
Schlumberger's stock has been under pressure because lower oil prices will impact oil service activity levels as well as pricing. The company said as much earlier in the month when it warned investors that its North American operations would likely experience a 15% decline in revenue from the third quarter due to a steeper-than-expected price drop for hydraulic fracturing services. Meanwhile, the company expects this weakness to persist at least through the first quarter of 2019. Because of that, its stock could remain under pressure in the near term.
However, the longer-term outlook for the oil market is much more positive. That's because oil companies need to continue investing in new supplies to meet expected demand growth. That should push prices high enough to justify the investment required to boost supply. In the view of analysts at Morgan Stanley, spending on oilfield services is expected to rise about 15% through 2020 after having increased 5% from the bottom in 2016. Meanwhile, the bank sees capital spending topping $583 billion by 2022, which is 30% higher than this year's anticipated level. That projected spending increase should boost margins for oilfield service companies like Schlumberger, which could drive its stock higher over the long term.
The bull and bear case for Baker Hughes
Baker Hughes should also benefit from the anticipated uptick in spending in the oil field over the next few years. In the company's view, global spending on exploration and production activities will rise at a 9% compound annual growth rate through 2021. That leads Baker Hughes to believe it can continue to expand its margins as the improvement in activities levels drives up service pricing. That expanding profitability should make the company more valuable in the coming years.
While both Baker Hughes and Schlumberger should benefit from the eventual recovery in the oilfield service market, Baker Hughes' stock price might lag its peers. That's because beleaguered industrial giant GE (GE 1.08%) has a controlling interest in the company that it's looking to unload. GE recently sold part of its position in the oilfield service company, including 92 million shares to the public and 65 million back to Baker Hughes, which reduced its stake in the company from 62.5% to around 50%. The timing of that sale is worth noting, as GE unloaded this stock after Baker Hughes' shares had plummeted 25% along with oil prices. That showed just how desperate the industrial giant is for cash. In light of that, there's a concern that it could continue selling off shares of Baker Hughes in the coming year at less-than-ideal times, which could put additional downward pressure on the stock price.
Schlumberger has the edge
While the recent slump in oil prices will likely keep the pressure on oilfield service stocks, the longer-term outlook appears much brighter given the view that industry activity levels appear poised to improve, which should boost oilfield service profits. However, while both Schlumberger and Baker Hughes would benefit from this eventual improvement in the oil market, Baker Hughes has an additional weight that could hold it back in the near term in the form of GE's desire to exit its position in the company. The less-encumbered Schlumberger could outperform its rival in the coming year, making it the better buy right now.