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4 Oilfield Services Stocks Set to Escape Industry Weakness
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Strict capital discipline among upstream energy companies is dampening the demand for oilfield services, leading to a gloomy outlook for the Zacks Oil and Gas- Field Services industry. The prosperity of companies within this industry greatly depends on their ability to navigate the evolving energy transition landscape skillfully. Consequently, failing to meet energy transition objectives will negatively impact cash flow.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Baker Hughes Company (BKR - Free Report) and Smart Sand Inc. (SND - Free Report) .
About the Industry
The Zacks Oil and Gas - Field Services industry comprises companies that primarily engage in providing support services to exploration and production players. These companies help in manufacturing, repairing and maintaining wells, drilling equipment, leasing of drilling rigs, seismic testing and transport and directional solutions, among others. Also, the firms help upstream energy players locate oil and natural gas and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream firms. Furthermore, with countries worldwide investing heavily in liquefied natural gas (LNG) terminals, a few oilfield service companies are extending their reach beyond the hydrocarbon fields and capitalizing on contracts for manufacturing equipment used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Highly Volatile Business: The demand for oilfield services is predominantly tied to exploration and production activities. Given the reliance of oil explorers and producers on the volatile commodity pricing landscape, the business of oilfield service companies is susceptible to uncertainty.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Impacts of Failing Energy Transition Goals on Cashflows: The prosperity of companies within the industry hinges greatly on their adeptness in navigating the evolving energy transition landscape. This encompasses the ability of oilfield service providers to efficiently tackle the decarbonization of oil and gas operations while expanding the adoption of inventive, low-carbon and carbon-neutral technologies. Consequently, falling short of energy transition objectives will have repercussions on cash flow.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 24-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #153, which places it in the bottom 39% 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 gloomy 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 consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite but outperformed the broader Zacks Oil – Energy sector over the past year.
The industry has jumped 26.6% over this period compared with the S&P 500’s rise of 27.7% and the broader sector’s 19.7% growth.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies 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 not just equity into account 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 EV/EBITDA, the industry is currently trading at 7.40X compared with the S&P 500’s 13.93X and sector’s 2.99X.
Over the past five years, the industry has traded as high as 12.68X and as low as 1.01X, with a median of 8.21X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Trying to Survive Industry Challenges
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 17.8% this year.
Price and Consensus: SLB
Baker Hughes: In the first quarter, the company attained two key, multi-year contracts for both onshore and offshore services from Petrobras through its Oilfield Service & Equipment business segment. Baker Hughes, with a Zacks Rank of 3, has thus secured incremental cashflows.
Price and Consensus: BKR
Halliburton Company: Halliburton is also a leading oilfield service player, expecting margin expansion from the international market. The Zacks #3 Ranked company is predicting year-over-year flat margins from its North American activities.
Price and Consensus: HAL
Smart Sand: Being a leading manufacturer of Northern White sand, known for its superior quality and cost-effectiveness, the company has a solid business model. The Northern White sand serves as a premium proppant in hydraulic fracturing processes to improve the recovery rates of hydrocarbons in both oil and natural gas wells. Smart Sand currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SND
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4 Oilfield Services Stocks Set to Escape Industry Weakness
Strict capital discipline among upstream energy companies is dampening the demand for oilfield services, leading to a gloomy outlook for the Zacks Oil and Gas- Field Services industry. The prosperity of companies within this industry greatly depends on their ability to navigate the evolving energy transition landscape skillfully. Consequently, failing to meet energy transition objectives will negatively impact cash flow.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Baker Hughes Company (BKR - Free Report) and Smart Sand Inc. (SND - Free Report) .
About the Industry
The Zacks Oil and Gas - Field Services industry comprises companies that primarily engage in providing support services to exploration and production players. These companies help in manufacturing, repairing and maintaining wells, drilling equipment, leasing of drilling rigs, seismic testing and transport and directional solutions, among others. Also, the firms help upstream energy players locate oil and natural gas and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream firms. Furthermore, with countries worldwide investing heavily in liquefied natural gas (LNG) terminals, a few oilfield service companies are extending their reach beyond the hydrocarbon fields and capitalizing on contracts for manufacturing equipment used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Highly Volatile Business: The demand for oilfield services is predominantly tied to exploration and production activities. Given the reliance of oil explorers and producers on the volatile commodity pricing landscape, the business of oilfield service companies is susceptible to uncertainty.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Impacts of Failing Energy Transition Goals on Cashflows: The prosperity of companies within the industry hinges greatly on their adeptness in navigating the evolving energy transition landscape. This encompasses the ability of oilfield service providers to efficiently tackle the decarbonization of oil and gas operations while expanding the adoption of inventive, low-carbon and carbon-neutral technologies. Consequently, falling short of energy transition objectives will have repercussions on cash flow.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 24-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #153, which places it in the bottom 39% 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 gloomy 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 consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite but outperformed the broader Zacks Oil – Energy sector over the past year.
The industry has jumped 26.6% over this period compared with the S&P 500’s rise of 27.7% and the broader sector’s 19.7% growth.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas companies 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 not just equity into account 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 EV/EBITDA, the industry is currently trading at 7.40X compared with the S&P 500’s 13.93X and sector’s 2.99X.
Over the past five years, the industry has traded as high as 12.68X and as low as 1.01X, with a median of 8.21X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Trying to Survive Industry Challenges
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 17.8% this year.
Price and Consensus: SLB
Baker Hughes: In the first quarter, the company attained two key, multi-year contracts for both onshore and offshore services from Petrobras through its Oilfield Service & Equipment business segment. Baker Hughes, with a Zacks Rank of 3, has thus secured incremental cashflows.
Price and Consensus: BKR
Halliburton Company: Halliburton is also a leading oilfield service player, expecting margin expansion from the international market. The Zacks #3 Ranked company is predicting year-over-year flat margins from its North American activities.
Price and Consensus: HAL
Smart Sand: Being a leading manufacturer of Northern White sand, known for its superior quality and cost-effectiveness, the company has a solid business model. The Northern White sand serves as a premium proppant in hydraulic fracturing processes to improve the recovery rates of hydrocarbons in both oil and natural gas wells. Smart Sand currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SND