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4 Oil & Gas Equipment Stocks to Fend Off Industry Headwinds
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The energy spectrum has witnessed massive demand destruction all around the globe due to the coronavirus pandemic. Multiple challenges in the path of demand growth and an oversupplied market are keeping the hydrocarbon industry under heightened levels of uncertainties, which have further marred the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.
However, with people gradually returning to work with the easing of travel bans and the rollout of multiple coronavirus vaccines, prospects for energy suppliers and oilfield equipment players have somewhat improved from last year. USA Compression Partners, LP (USAC - Free Report) , NOW Inc. (DNOW - Free Report) , National Energy Services Reunited Corp. (NESR - Free Report) and Oil States International, Inc. (OIS - Free Report) are among the frontrunners in the industry trying to survive the challenging business scenario.
Industry Description
The Zacks Oil and Gas - Mechanical and Equipment industry comprise companies that provide necessary oilfield equipment — production machinery, pumps, valves and several other drilling appliances like rig components — to exploration and production companies. These help upstream players in the extraction of oil and natural gas from fields, both onshore and offshore.
Uncertain Pricing Scenario: Although the crude oil price has significantly recovered in the past few months, it is very much reliant on OPEC+ production curbs, making the gain volatile and unsustainable. Last year, the dented crude price, on account of coronavirus, has forced most upstream companies to cut their capital spending budget. The cautious explorers and producers are still not boosting spending to pre-pandemic levels, keeping demand low for oilfield equipment service providers. The situation is not expected to dramatically improve back to pre-pandemic levels until the end of 2021 or early 2022.
Rig Count Down Y/Y: Upstream operation curtailment is quite clear by the fact that drillers have significantly removed rigs from domestic and international markets. Per data provided by Baker Hughes Company (BKR), the rig count is down by 361 rigs year over year in the United States. Moreover, the international market has witnessed a year-over-year decline of 384 units in the rig count. The decreased rig count indicates lower demand for the services provided by oilfield equipment suppliers. Even though the past few months witnessed a resumption of upstream activities in the U.S. shale plays, upstream firms are playing defensively. They are now prioritizing sensitive capital allocation and value increase for shareholders over rapid production rise. Therefore, the oilfield equipment industry outlook appears gloomy.
Bleak Offshore Opportunities: Oil and gas producers are keen to focus on onshore drilling, wherein costs associated with drilling are much lower than that of offshore expenses. Offshore projects are highly capital-intensive, which is why project leaders are delaying investment decisions as they rather concentrate on shale plays. Hence, even though the overall energy market is currently witnessing some improvements, the subsea equipment market demand outlook is far from being encouraging. Thus, capital equipment bookings for the offshore market are yet to witness any substantial turnaround.
Building Resiliency: To navigate through the tough market conditions, oilfield equipment providers have resorted to balance sheet strengthening and sensitive capital expenditure. This is likely to help the companies survive the market downturns while boosting resiliency. Oilfield equipment providers are now depending on capital efficiency to increase cash retaining and value generation from their operations, which will enable them to thrive in the long term. Their drive to reduce costs and expenses from operations will likely enable the companies to boost their profits.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #167, which places it in the bottom 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2021 have moved 30.4% downward in the past year, the same for 2022 has declined 25%.
Before we present a few stocks that you may want to buy or retain, as these can navigate through the uncertainties, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats Sector and S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has jumped 81.2% in the past year compared with the broader sector’s rise of 53.9%. The S&P 500 has risen 61.2% in the same time frame.
One-Year Price Performance
Industry’s Current Valuation
Since oilfield equipment providers are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 4.76X, lower than the S&P 500’s 17.51X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 5.94X.
Over the past five years, the industry has traded as high as 48.04X, as low as 2.48X, and with a median of 11.40X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Equipment Stocks to Keep a Close Eye on
Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while or holding on to these three fundamentally-sound Zacks Rank #3 (Hold) stocks. Moreover, we are providing another stock with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
National Energy Services: This Houston, TX-based company is a leader in providing oilfield services in the Middle East and Asia Pacific region. The company's hydraulic fracturing, cementing, completions, filtration and other services provide it with a steady recurring revenue stream. This Zacks Rank #2 company boosts the efficiency of its clients’ operations by proving downhole tools, directional drilling, testing services and others. The company’s bottom line is expected to grow 46.2% year over year in 2021. It has beaten earnings estimates in the past four quarters, with an average surprise of 22.6%. The stock has returned 15.7% in the year-to-date period.
Price and Consensus: NESR
USA Compression Partners: This firm is one of the largest independent natural gas compression services providers across the United States, in terms of fleet horsepower. The partnership is also involved engineering, design, operation, service and repair of compressor units. USA Compression Partners earns revenues based on the overall horsepower usage of natural gas transported rather than the price. In fact, the firm is largely insulated to fluctuations in commodity prices. Its bottom line is expected to grow 96.2% year over year in 2021. This Zacks Rank #3 company beat earnings estimates twice in the trailing four quarters and missed on the other two occasions. It has delivered a four-quarter earnings surprise of 64.6%, on average.
Price and Consensus: USAC
NOW Inc.: Headquartered in Houston, TX, NOW is a leading provider of downstream energy and industrial products to different energy companies in North America and international markets. Its services include providing supply chain and materials management solutions to clients. Despite the current market volatility, the company generated $181 million of free cash flow in the trailing 12-month period. Notably, the Zacks Rank #3 player has seen three upward estimate revisions and one downward movement for its 2021 bottom line in the past 60 days. Earnings per share are expected to grow 58.5% year over year in 2021. It beat earnings estimates twice in the trailing four quarters and missed on other two occasions. It has delivered a four-quarter earnings surprise of 6.2%, on average.
Price and Consensus: DNOW
Oil States International: This Houston, TX-based company provides highly engineered capital equipment for the oil and gas industry players. This Zacks Rank #3 company’s manufacturing and service facilities are strategically located around the world. To navigate through the current market uncertainty due to the coronavirus pandemic, it has been focusing strongly on cost-reduction initiatives. Notably, its bottom line is expected to grow 50% year over year in 2021. This company has beaten earnings estimates in the past four quarters, with an average surprise of 22.1%.
Price and Consensus: OIS
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4 Oil & Gas Equipment Stocks to Fend Off Industry Headwinds
The energy spectrum has witnessed massive demand destruction all around the globe due to the coronavirus pandemic. Multiple challenges in the path of demand growth and an oversupplied market are keeping the hydrocarbon industry under heightened levels of uncertainties, which have further marred the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.
However, with people gradually returning to work with the easing of travel bans and the rollout of multiple coronavirus vaccines, prospects for energy suppliers and oilfield equipment players have somewhat improved from last year. USA Compression Partners, LP (USAC - Free Report) , NOW Inc. (DNOW - Free Report) , National Energy Services Reunited Corp. (NESR - Free Report) and Oil States International, Inc. (OIS - Free Report) are among the frontrunners in the industry trying to survive the challenging business scenario.
Industry Description
The Zacks Oil and Gas - Mechanical and Equipment industry comprise companies that provide necessary oilfield equipment — production machinery, pumps, valves and several other drilling appliances like rig components — to exploration and production companies. These help upstream players in the extraction of oil and natural gas from fields, both onshore and offshore.
4 Trends Defining Oilfield Equipment Industry’s Future
Uncertain Pricing Scenario: Although the crude oil price has significantly recovered in the past few months, it is very much reliant on OPEC+ production curbs, making the gain volatile and unsustainable. Last year, the dented crude price, on account of coronavirus, has forced most upstream companies to cut their capital spending budget. The cautious explorers and producers are still not boosting spending to pre-pandemic levels, keeping demand low for oilfield equipment service providers. The situation is not expected to dramatically improve back to pre-pandemic levels until the end of 2021 or early 2022.
Rig Count Down Y/Y: Upstream operation curtailment is quite clear by the fact that drillers have significantly removed rigs from domestic and international markets. Per data provided by Baker Hughes Company (BKR), the rig count is down by 361 rigs year over year in the United States. Moreover, the international market has witnessed a year-over-year decline of 384 units in the rig count. The decreased rig count indicates lower demand for the services provided by oilfield equipment suppliers. Even though the past few months witnessed a resumption of upstream activities in the U.S. shale plays, upstream firms are playing defensively. They are now prioritizing sensitive capital allocation and value increase for shareholders over rapid production rise. Therefore, the oilfield equipment industry outlook appears gloomy.
Bleak Offshore Opportunities: Oil and gas producers are keen to focus on onshore drilling, wherein costs associated with drilling are much lower than that of offshore expenses. Offshore projects are highly capital-intensive, which is why project leaders are delaying investment decisions as they rather concentrate on shale plays. Hence, even though the overall energy market is currently witnessing some improvements, the subsea equipment market demand outlook is far from being encouraging. Thus, capital equipment bookings for the offshore market are yet to witness any substantial turnaround.
Building Resiliency: To navigate through the tough market conditions, oilfield equipment providers have resorted to balance sheet strengthening and sensitive capital expenditure. This is likely to help the companies survive the market downturns while boosting resiliency. Oilfield equipment providers are now depending on capital efficiency to increase cash retaining and value generation from their operations, which will enable them to thrive in the long term. Their drive to reduce costs and expenses from operations will likely enable the companies to boost their profits.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #167, which places it in the bottom 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2021 have moved 30.4% downward in the past year, the same for 2022 has declined 25%.
Before we present a few stocks that you may want to buy or retain, as these can navigate through the uncertainties, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats Sector and S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has jumped 81.2% in the past year compared with the broader sector’s rise of 53.9%. The S&P 500 has risen 61.2% in the same time frame.
One-Year Price Performance
Industry’s Current Valuation
Since oilfield equipment providers are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 4.76X, lower than the S&P 500’s 17.51X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 5.94X.
Over the past five years, the industry has traded as high as 48.04X, as low as 2.48X, and with a median of 11.40X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Equipment Stocks to Keep a Close Eye on
Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while or holding on to these three fundamentally-sound Zacks Rank #3 (Hold) stocks. Moreover, we are providing another stock with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
National Energy Services: This Houston, TX-based company is a leader in providing oilfield services in the Middle East and Asia Pacific region. The company's hydraulic fracturing, cementing, completions, filtration and other services provide it with a steady recurring revenue stream. This Zacks Rank #2 company boosts the efficiency of its clients’ operations by proving downhole tools, directional drilling, testing services and others. The company’s bottom line is expected to grow 46.2% year over year in 2021. It has beaten earnings estimates in the past four quarters, with an average surprise of 22.6%. The stock has returned 15.7% in the year-to-date period.
Price and Consensus: NESR
USA Compression Partners: This firm is one of the largest independent natural gas compression services providers across the United States, in terms of fleet horsepower. The partnership is also involved engineering, design, operation, service and repair of compressor units. USA Compression Partners earns revenues based on the overall horsepower usage of natural gas transported rather than the price. In fact, the firm is largely insulated to fluctuations in commodity prices. Its bottom line is expected to grow 96.2% year over year in 2021. This Zacks Rank #3 company beat earnings estimates twice in the trailing four quarters and missed on the other two occasions. It has delivered a four-quarter earnings surprise of 64.6%, on average.
Price and Consensus: USAC
NOW Inc.: Headquartered in Houston, TX, NOW is a leading provider of downstream energy and industrial products to different energy companies in North America and international markets. Its services include providing supply chain and materials management solutions to clients. Despite the current market volatility, the company generated $181 million of free cash flow in the trailing 12-month period. Notably, the Zacks Rank #3 player has seen three upward estimate revisions and one downward movement for its 2021 bottom line in the past 60 days. Earnings per share are expected to grow 58.5% year over year in 2021. It beat earnings estimates twice in the trailing four quarters and missed on other two occasions. It has delivered a four-quarter earnings surprise of 6.2%, on average.
Price and Consensus: DNOW
Oil States International: This Houston, TX-based company provides highly engineered capital equipment for the oil and gas industry players. This Zacks Rank #3 company’s manufacturing and service facilities are strategically located around the world. To navigate through the current market uncertainty due to the coronavirus pandemic, it has been focusing strongly on cost-reduction initiatives. Notably, its bottom line is expected to grow 50% year over year in 2021. This company has beaten earnings estimates in the past four quarters, with an average surprise of 22.1%.
Price and Consensus: OIS
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If you’re looking for big gains, there couldn’t be a better time to get in on a young industry primed to skyrocket from $17.7 billion back in 2019 to an expected $73.6 billion by 2027.
After a clean sweep of 6 election referendums in 5 states, pot is now legal in 36 states plus D.C. Federal legalization is expected soon and that could be a still greater bonanza for investors. Even before the latest wave of legalization, Zacks Investment Research has recommended pot stocks that have shot up as high as +285.9%
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