Are These Blue-Chip Oil Services Names Cheap?

High oil prices may again be front page news in 2012. The price of crude oil has been persistently high despite an uncertain economic outlook. In particular, tensions in the Middle East are causing crude oil to trade at a premium, and continued unrest in the region could put a high floor on prices going forward.

With crude trading just below $100 on Wednesday, however, a substantial divergence has developed between the performance of the commodity and oil service stocks. Spot crude is up roughly $9 on the year, whereas the Market Vectors Oil Services ETF (NYSE: OIH) has lost almost 19% in 2011.

While the correlation is hardly perfect, the price of oil and the performance of the OIH have historically been positively correlated. Examining a chart of the United States Oil Fund ETF (NYSE: USO), which tracks NYMEX crude, and the Market Vectors Oil Services ETF (OIH) shows that divergences between the performance of the two securities have had a tendency to revert in 2011.

This phenomenon is also apparent on a longer term basis. Over the last 6 months, a fairly wide spread has developed between the OIH and the USO. During this time period, the USO is up 5.37%, while the OIH has lost nearly 23%. Also, in the last three months, the USO has risen 23% versus a gain of just 5.75% for the OIH.

This spread between oil service stocks and the price of crude could be suggesting that the stocks are cheap compared to the underlying commodity. Let's examine some blue-chip services names to see if there are in fact some opportunities in the space.

Schlumberger (NYSE: SLB) - This is the King Kong of the oil services industry. SLB currently has a market cap of just over $90 billion and has been a fairly strong long term performer. Year-to-date, however, the stock is down more than 19%, including more than 20% over the last 6 months. The stock has fallen from a 52-week high of $95.64 in July to $67.00 today. SLB currently trades at a trailing P/E of 19.91, a forward P/E of! 13.74 a nd a PEG ratio of 0.80. As risk appetite has contracted in recent months, it has caused valuations in the oil services industry to become much more compelling and SLB looks like it could be a bargain - if the market cooperates in 2012. Wall Street analysts remain bullish on the name, with a mean price target of $91.03 and a high target of $112.00. SLB also offers a 1.49% dividend yield at current levels.

Baker Hughes (NYSE: BHI) - This company is one of the better known names in the oil services sector. Baker Hughes currently has a market cap of $21 billion and has been rather volatile in 2011. The stock is trading well off of its 52-week high of $81.00 at $48.32. Year-to-date, BHI shares are down 15.55%, including 31.75% in the last 6 months. The stock trades at a trailing P/E of 12, a forward P/E of 8.72 and a PEG ratio of 0.37. On a valuation basis, BHI looks very cheap, and Wall Street analysts agree. The Street has a mean price target on the stock of $75.56 and a high target of $100. BHI also yields 1.24% at current levels. This is a name that investors looking to add energy exposure may want to research further.

Halliburton (NYSE: HAL) - This stock is another example of a name that has fallen precipitously as a result of investors' shrinking appetites for risk. For much of 2011, HAL was a very strong performing stock, hitting a 52-week high of $57.77 in July. When the market pulled back, however, HAL was hit hard and has now notched a better than 18% loss in 2011 and trades at $33.26. If risk appetite returns in 2012, HAL is a name that should reward investors. The company has a market cap of $30.65 billion and is currently yielding 1.08%. Like the other names on this list, the company's valuation appears compelling. The stock trades at a trailing P/E of 12.11, a forward P/E of just 8.08 and a PEG ratio of 0.39. Analysts also remain bullish on Halliburton. The Street has a median price target on the name of $53.83 and a high target of $75.00.

W! hen look ing at some of the blue-chip oil service names, it becomes apparent that there is still a lot of fear and pessimism in the broader market. The valuations of these stocks appear to be dirt cheap, particularly in light of persistently high spot crude prices. Investors are steeply discounting a number of factors relating to the industry and the market as a whole.

Fears over the regulatory environment, potentially volatile revenues depending on oil prices and the economy, and worries over international profitability have been weighing on the sector since the summer. If, however, some of these concerns prove to be overblown and 2012 is a good year for risk assets, investors should pocket some very nice returns in oil service stocks if they buy at current levels.