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Conservative E&P Spending Haunts Oil & Gas Equipment Industry
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The Zacks Oil and Gas- Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment, including production machinery, pumps, valves, along with several other drilling appliances like rigs and rig components to exploration and production companies. These help the upstream players in the extraction of oil from fields, both onshore and offshore.
Let’s take a look at the industry’s three major themes:
Oil prices continue to remain in the bearish territory as demand for energy remains low owing to a slowdown in global economic growth. Thus, explorers and producers are not getting incentives to produce crude volumes on a massive scale. Hence, with lower growth in crude production, demand for oilfield equipment is likely to remain weak.
Drillers in North America have been spending conservatively since the beginning of 2019. This is because investors are asking explorers to return more capital instead of focusing solely on oil production. Drilling activities have slowed down as more and more rigs are being removed from oil and gas fields in the continent. In fact, rigs in the United States totaled 851 as of Oct 18, 2019, down by 216 year over year, per data provided by Baker Hughes Company (BKR - Free Report) . The slowdown in drilling operations has further clouded the outlook for oilfield equipment contracts.
Promising outlook for oilfield equipment suppliers in international market and offshore prospects is likely to partially make up for the weak North American operations. Not only drillers in international resources are employing more rigs, there has also been an increase in the number of final investment decision approvals for new E&P projects in markets outside North America. Thus, more contracts await the companies outside the domestic market.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #201, which places it in the bottom 21% 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 lackluster near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2019 has declined 107.8%.
Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can buy or retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector and S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has underperformed the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.
The industry has declined 38.2% in the past year compared with the broader sector’s decrease of 14.8%. The S&P 500 in contrast has risen 12.1% 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 2.06X, lower than the S&P 500’s 11.15X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.64X.
Over the past five years, the industry has traded as high as 21.63X, as low as 2.04X, with a median of 4.90X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Without a definitive solution to the U.S. China trade war, the bleak overall demand outlook will keep haunting the energy sector and oil prices. Also, investors pushing for more return, rather than expansion and output growth will keep upstream companies under check. While these factors will keep affecting demand for oilfield equipment in the short term, recovering international and offshore prospects may provide relief to the industry.
Further, sector consolidation, adoption of superior technologies, new operational systems’ optimization of the fleet through strategic sell-offs and acquisition and profitable collaborations among other strategic strides will boost prospects of the mechanical and equipment industry.
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and one stock with Zacks Rank #2 (Buy) that are poised for growth. There are two other stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
Matrix Service Company (MTRX - Free Report) : Headquartered in Tulsa, OK, the company provides specialized engineering, construction, fabrication, infrastructure and maintenance services in different types of markets in the United States and abroad. This Zacks Rank #1 company’s fiscal 2020 earnings are expected to witness year-over-year growth of 58.4%.
Price and Consensus: MTRX
Exterran Corporation : This Zacks Rank #2 company is a leading provider of products and services related to processing, treatment and compression to energy companies. The Zacks Consensus Estimate for the company’s earnings for 2019 has been revised upward over the past 30 days.
Price and Consensus: EXTN
Dril-Quip, Inc. (DRQ - Free Report) : It is a Delaware corporation that manufactures highly engineered offshore drilling and production equipment for deep-water severe-service applications and harsh environmental conditions. This Zacks Rank #3 company has an expected earnings growth rate of 136.5% for 2019.
Price and Consensus: DRQ
National Oilwell Varco, Inc. (NOV - Free Report) : This Houston, TX-based company is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, and equipment used in oil and gas drilling and production worldwide. The Zacks Rank #3 company is expected to witness year-over-year growth of 137.5% in bottom line in 2019.
Price and Consensus: NOV
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
Conservative E&P Spending Haunts Oil & Gas Equipment Industry
The Zacks Oil and Gas- Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment, including production machinery, pumps, valves, along with several other drilling appliances like rigs and rig components to exploration and production companies. These help the upstream players in the extraction of oil from fields, both onshore and offshore.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Dull Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #201, which places it in the bottom 21% 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 lackluster near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2019 has declined 107.8%.
Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can buy or retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector and S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has underperformed the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.
The industry has declined 38.2% in the past year compared with the broader sector’s decrease of 14.8%. The S&P 500 in contrast has risen 12.1% 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 2.06X, lower than the S&P 500’s 11.15X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.64X.
Over the past five years, the industry has traded as high as 21.63X, as low as 2.04X, with a median of 4.90X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Without a definitive solution to the U.S. China trade war, the bleak overall demand outlook will keep haunting the energy sector and oil prices. Also, investors pushing for more return, rather than expansion and output growth will keep upstream companies under check. While these factors will keep affecting demand for oilfield equipment in the short term, recovering international and offshore prospects may provide relief to the industry.
Further, sector consolidation, adoption of superior technologies, new operational systems’ optimization of the fleet through strategic sell-offs and acquisition and profitable collaborations among other strategic strides will boost prospects of the mechanical and equipment industry.
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and one stock with Zacks Rank #2 (Buy) that are poised for growth. There are two other stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Matrix Service Company (MTRX - Free Report) : Headquartered in Tulsa, OK, the company provides specialized engineering, construction, fabrication, infrastructure and maintenance services in different types of markets in the United States and abroad. This Zacks Rank #1 company’s fiscal 2020 earnings are expected to witness year-over-year growth of 58.4%.
Price and Consensus: MTRX
Exterran Corporation : This Zacks Rank #2 company is a leading provider of products and services related to processing, treatment and compression to energy companies. The Zacks Consensus Estimate for the company’s earnings for 2019 has been revised upward over the past 30 days.
Price and Consensus: EXTN
Dril-Quip, Inc. (DRQ - Free Report) : It is a Delaware corporation that manufactures highly engineered offshore drilling and production equipment for deep-water severe-service applications and harsh environmental conditions. This Zacks Rank #3 company has an expected earnings growth rate of 136.5% for 2019.
Price and Consensus: DRQ
National Oilwell Varco, Inc. (NOV - Free Report) : This Houston, TX-based company is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, and equipment used in oil and gas drilling and production worldwide. The Zacks Rank #3 company is expected to witness year-over-year growth of 137.5% in bottom line in 2019.
Price and Consensus: NOV
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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