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3 Oil & Gas Equipment Stocks to Buy Despite Challenging Industry
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The rapidly spreading new variants of coronavirus have induced fresh concerns that renewed lockdown can dent global fuel demand. This has clouded the Zacks Oil and Gas- Mechanical and Equipment industry’s outlook since the companies in the industry generate cashflow by providing equipment and services to energy companies across the globe.
However, with coronavirus vaccines being rolled out at a massive scale and with initial investigations revealing that the latest variant of the virus will not be as deadly as the earlier one, the overall business scenario will possibly improve gradually. Among the frontrunners in the industry that are trying to survive the challenging business scenario are NOW Inc. (DNOW - Free Report) , Exterran Corporation and Superior Drilling Products, Inc. (SDPI - Free Report) .
About the Industry
The Zacks Oil and Gas - Mechanical and Equipment industry comprises 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 energy players extract crude oil and natural gas from fields, both onshore and offshore. Hence, the wellbeing of oilfield equipment businesses is positively correlated to expenditures by upstream companies. These companies receive deals from integrated energy firms and independent as well as national oil and gas companies. Oilfield equipment providers also design, manufacture, engineer, and install products used to treat and process crude oil, natural gas, and others. Their products also comprise gadgets and instruments used in gas compression packages and water treatment works.
What's Shaping the Future of the Oil & Gas Equipment Industry?
Upstream Business Uncertainty: The coronavirus pandemic continues to affect the global fuel demand, although vaccines are being rolled out at a massive scale. With the omicron variant of COVID-19 spreading rapidly, the outlook for global fuel demand is still uncertain. The uncertainty in fuel demand is likely to hurt the production of the commodity, which in turn will lower the demand for energy and industrial solutions, products and engineered equipment packages.
Explorers’ Conservative Capital Spending: Oil and gas exploration and production companies are facing heightened pressure from investors to focus on stockholders’ returns rather than production. This is hindering the production of commodities, thereby denting demand for the companies’ products and services that include tools & welding equipment, drilling and completions equipment, and many others.
Lack of Long-Term Contracts: Considering the nature of businesses, many companies belonging to the industry lack long-term contracts with their customers. Also, since the customers are not liable to any minimum purchase volumes, the business model of the oil and gas equipment providers is not immune to the volatility in commodity prices. Thus, the companies belonging to the industry are not securing stable cashflows and are exposed to coronavirus-induced business uncertainty.
Absence of Contracts With Most Suppliers: Companies belonging to the Oil and Gas - Mechanical and Equipment industry are heavily dependent on a wide variety of manufacturers and suppliers to distribute products to clients. The companies have contracts with very few of their suppliers. Thus, the companies are prone to the loss of any potential supplier, which will make it difficult to find other new suppliers at favorable terms. Thus, there lie huge possibilities of adverse effects on product offerings and businesses.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Oil and Gas - Mechanical and Equipment is an 11-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.
Before we present a few stocks that you may want to buy, as these can navigate through the uncertainties, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has underperformed the broader Zacks Oil - Energy sector and Zacks S&P 500 composite over the past year.
The industry has declined 6% in the past year compared with the broader sector’s rise of 24.3%. The S&P 500 has risen 28.4% 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 7.12X, lower than the S&P 500’s 15.78X. However, it is higher than the sector’s trailing-12-month EV/EBITDA of 4.51X.
Over the past five years, the industry has traded as high as 48.04X, as low as 2.48X, and with a median of 11.85X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges
NOW Inc: NOW generates significant cashflows by offering a comprehensive line of products and solutions to the energy companies worldwide that are involved in upstream, midstream and downstream activities. With a legacy of operating history of more than 150 years, NOW provides support to both onshore and offshore activities in prolific oil and gas resources spreading across the world.
With no outstanding debt, NOW has a strong balance sheet. Shares of NOW, carrying a Zacks Rank #2 (Buy), have gained 20% so far this year, backed by its ability to sail through business uncertainties. The Zacks Consensus Estimate for NOW’s current-year earnings per share indicates a 103.1% year-over-year increase.
Price and Consensus: DNOW
Exterran Corporation: Being a leading global provider of natural gas processing and treatment and compression products and services, Exterran is well placed in generating significant cashflows. As of Sep 30, 2021, Exterran has a strong backlog of $1.8 billion, securing additional earnings.
Exterran has set a strategic focus on continuously protecting balance sheets while driving operations cashflows. Exterran, with Zacks Rank of 2, has the necessary skillset and know-how to participate in energy transitions. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: EXTN
Superior Drilling Products Inc: Being a leader in providing cost-saving solutions that will boost production efficiencies of oil and gas drilling activities, Superior Drilling Products is well placed in generating significant cashflows. Superior Drilling Products is banking on robust demand for tools and manufacturing and refurbishment services.
With growing market penetration, Superior Drilling Products generates more revenues from the international market. Also, competitive advantages are leading the Zacks #2 Ranked stock in generating significant revenues from North American activities.
Price and Consensus: SDPI
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3 Oil & Gas Equipment Stocks to Buy Despite Challenging Industry
The rapidly spreading new variants of coronavirus have induced fresh concerns that renewed lockdown can dent global fuel demand. This has clouded the Zacks Oil and Gas- Mechanical and Equipment industry’s outlook since the companies in the industry generate cashflow by providing equipment and services to energy companies across the globe.
However, with coronavirus vaccines being rolled out at a massive scale and with initial investigations revealing that the latest variant of the virus will not be as deadly as the earlier one, the overall business scenario will possibly improve gradually. Among the frontrunners in the industry that are trying to survive the challenging business scenario are NOW Inc. (DNOW - Free Report) , Exterran Corporation and Superior Drilling Products, Inc. (SDPI - Free Report) .
About the Industry
The Zacks Oil and Gas - Mechanical and Equipment industry comprises 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 energy players extract crude oil and natural gas from fields, both onshore and offshore. Hence, the wellbeing of oilfield equipment businesses is positively correlated to expenditures by upstream companies. These companies receive deals from integrated energy firms and independent as well as national oil and gas companies. Oilfield equipment providers also design, manufacture, engineer, and install products used to treat and process crude oil, natural gas, and others. Their products also comprise gadgets and instruments used in gas compression packages and water treatment works.
What's Shaping the Future of the Oil & Gas Equipment Industry?
Upstream Business Uncertainty: The coronavirus pandemic continues to affect the global fuel demand, although vaccines are being rolled out at a massive scale. With the omicron variant of COVID-19 spreading rapidly, the outlook for global fuel demand is still uncertain. The uncertainty in fuel demand is likely to hurt the production of the commodity, which in turn will lower the demand for energy and industrial solutions, products and engineered equipment packages.
Explorers’ Conservative Capital Spending: Oil and gas exploration and production companies are facing heightened pressure from investors to focus on stockholders’ returns rather than production. This is hindering the production of commodities, thereby denting demand for the companies’ products and services that include tools & welding equipment, drilling and completions equipment, and many others.
Lack of Long-Term Contracts: Considering the nature of businesses, many companies belonging to the industry lack long-term contracts with their customers. Also, since the customers are not liable to any minimum purchase volumes, the business model of the oil and gas equipment providers is not immune to the volatility in commodity prices. Thus, the companies belonging to the industry are not securing stable cashflows and are exposed to coronavirus-induced business uncertainty.
Absence of Contracts With Most Suppliers: Companies belonging to the Oil and Gas - Mechanical and Equipment industry are heavily dependent on a wide variety of manufacturers and suppliers to distribute products to clients. The companies have contracts with very few of their suppliers. Thus, the companies are prone to the loss of any potential supplier, which will make it difficult to find other new suppliers at favorable terms. Thus, there lie huge possibilities of adverse effects on product offerings and businesses.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Oil and Gas - Mechanical and Equipment is an 11-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.
Before we present a few stocks that you may want to buy, as these can navigate through the uncertainties, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has underperformed the broader Zacks Oil - Energy sector and Zacks S&P 500 composite over the past year.
The industry has declined 6% in the past year compared with the broader sector’s rise of 24.3%. The S&P 500 has risen 28.4% 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 7.12X, lower than the S&P 500’s 15.78X. However, it is higher than the sector’s trailing-12-month EV/EBITDA of 4.51X.
Over the past five years, the industry has traded as high as 48.04X, as low as 2.48X, and with a median of 11.85X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges
NOW Inc: NOW generates significant cashflows by offering a comprehensive line of products and solutions to the energy companies worldwide that are involved in upstream, midstream and downstream activities. With a legacy of operating history of more than 150 years, NOW provides support to both onshore and offshore activities in prolific oil and gas resources spreading across the world.
With no outstanding debt, NOW has a strong balance sheet. Shares of NOW, carrying a Zacks Rank #2 (Buy), have gained 20% so far this year, backed by its ability to sail through business uncertainties. The Zacks Consensus Estimate for NOW’s current-year earnings per share indicates a 103.1% year-over-year increase.
Price and Consensus: DNOW
Exterran Corporation: Being a leading global provider of natural gas processing and treatment and compression products and services, Exterran is well placed in generating significant cashflows. As of Sep 30, 2021, Exterran has a strong backlog of $1.8 billion, securing additional earnings.
Exterran has set a strategic focus on continuously protecting balance sheets while driving operations cashflows. Exterran, with Zacks Rank of 2, has the necessary skillset and know-how to participate in energy transitions. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: EXTN
Superior Drilling Products Inc: Being a leader in providing cost-saving solutions that will boost production efficiencies of oil and gas drilling activities, Superior Drilling Products is well placed in generating significant cashflows. Superior Drilling Products is banking on robust demand for tools and manufacturing and refurbishment services.
With growing market penetration, Superior Drilling Products generates more revenues from the international market. Also, competitive advantages are leading the Zacks #2 Ranked stock in generating significant revenues from North American activities.
Price and Consensus: SDPI