By Sam Boughedda
A Morgan Stanley analyst upgraded shares of Helmerich & Payne (NYSE:HP) to Equal-Weight and downgraded Nextier Oilfield Solutions (NYSE:NEX) to Equal-Weight and Core Laboratories (NYSE:CLB) to Underweight in a note Monday.
The analyst explained that the NAm cycle is maturing, and cash generation/returns are taking primacy over EBITDA revisions, while service companies adopting payout models "will be rewarded" in their view. As a result, Morgan Stanley has tilted its ratings in favor of land drillers.
"Following substantial activity and pricing growth, we think the biggest debate in NAm services is how far service companies can push 2023 pricing, and what they will do with 2023 FCF. Leaving pricing aside for the moment, we think that shareholder returns frameworks will be increasingly adopted by NAm OFS companies," added the analyst, who also lifted Helmerich & Payne's price target to $55 from $48.
"The NAm services industry has potential to better delineate capital returns and reinvestment frameworks to prove to the market that another cyclical capacity overbuild is not underway. We are accordingly shifting our ratings skew to favor FCF revisions and capital return potential."