Improvement in crude oil prices has been enabling producers to bring back curtailed volumes and reviving shale activities in the domestic market. Moreover, international opportunities can provide an impetus to oilfield service providers, thereby making the outlook for the Zacks Oil and Gas- Field Services industry bullish.
Importantly, with people gradually returning to work due to the easing of lockdown measures, energy demand is set to improve. This can lead to higher oilfield activities and completions in North America. The frontrunners in the industry that are trying to cash in on the recovery include Schlumberger Limited (SLB - Free Report) , Baker Hughes Company (BKR - Free Report) , Halliburton Company (HAL - Free Report) and TechnipFMC plc (FTI - Free Report) .
About the Industry
The Zacks Oil and Gas- Field Services industry comprises companies that primarily engage in providing support services to upstream players. These companies help in manufacturing, repairing and maintaining wells and drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among others.
What’s Shaping the Future of Oilfield Services Industry?
Improving Prices: Crude oil prices have rebounded after falling into unprecedented negative territory in April. The WTI Crude price is currently above the $40 per barrel mark. Although the price level is lower than $60 per barrel at the beginning of 2020, the improvement that was triggered by the easing of coronavirus-induced lockdowns will keep encouraging activities in the shale plays and resume shut-in productions. Significant number of upstream players operating in places like the Permian Basin, Eagle Ford and other regions can make profits at the current price level. Hence, oilfield service providers will likely experience improving demand for their services from these oil-rich regions.
International Market Opportunities: While the domestic market is expected to witness a modest uptick in completion activities in the second half of the year, the international market can drive growth for oilfield service providers. The Middle East is expected to provide opportunities to companies with major global presence. Schlumberger, which has lost some opportunities in Saudi Arabia due to OPEC+ production curtailment, will likely be able to offset the negatives with rising activity in Qatar and Kuwait. Halliburton CEO Jeff Miller expects oil-related activities in OPEC countries to endure the market challenges and bounce back strong. Moreover, investments in North Sea activities from producers like Equinor ASA (EQNR - Free Report) and Apache Corporation (APA - Free Report) can increase.
Consolidations: Oilfield service providers are reeling under heavy debt burden and declining cash flows, which are weighing on their near-term credit quality. This is making survival difficult for the concerned companies as the oilfield service market in North America is highly competitive. While the large-cap entities are more poised to regain their credit strength, the smaller players are likely to go through a rough patch, especially given the current market situation. The current market volatility will likely allow companies to acquire rich assets at beaten down prices. The situation has created space for mergers and consolidations. For instance, Schlumberger recently agreed to contribute the OneStim business to Liberty Oilfield Services Inc. (LBRT - Free Report) for a 37% stake in the combined entity.
Rising Digital Adoption: The pandemic has caused massive energy demand destruction all around the globe, forcing exploration and production companies to slash capital expenditures and adopt cost-cutting measures. The effects of these moves are bound to trickle down to oilfield service providers. In fact, 72% of Baker Hughes’ drilling activities used remote technologies in the second quarter. Moreover, the digital segment of Schlumberger is expected to increase in the coming days as the company is likely to boost remote initiatives. Hence, the adoption of new efficient, cleaner and safer technologies is expected to lay a sustainable path for the companies in the oilfield services industry.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Oil and Gas – Field Services is a 28-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #77, which places it in the top 31% 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 bright 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.
Before we present a few stocks that you may want to buy or retain, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Beats Sector, Lags S&P 500
The Zacks Oil and Gas - Field Services industry has outperformed the broader Zacks Oil - Energy sector but lagged the Zacks S&P 500 composite over the past year.
The industry has declined 8% in the past year compared with the broader sector’s fall of 33.9%. The S&P 500 has gained 15.9% in the same time frame.
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 2.70X compared with the S&P 500’s 13.00X and the sector’s 4.31X.
Over the past five years, the industry has traded as high as 13.74X, as low as 1.92X, with a median of 9.34X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks to Keep a Close Eye on
While none of the stocks from the oilfield services universe currently holds a Zacks Rank #1 (Strong Buy), we have one stock with a Zacks Rank #2 (Buy). Additionally, we suggest three other stocks with a Zacks Ranks #3 (Hold) from the same industry, which investors may closely watch. You can see the complete list of today’s Zacks #1 Rank stocks here.
Halliburton Company: Houston, TX-based Halliburton Company is one of the largest oilfield service providers in the world. The company's ability to generate positive free cash flow even in a tough market environment indicates operational strength. Halliburton’s healthy relationship with national oil companies and digitization efforts bode well. This company is likely to see earnings growth of 6.5% in the next five years.
With the stock jumping 11% in the past three months, this Zacks Rank #2 company’s core strength in providing best-in-class cementing, stimulation, intervention and completion services bolsters its prospects. The Zacks Consensus Estimate for 2020 earnings has been revised upward to a profit of 54 cents per share from a loss of 6 cents in the past 60 days.
Price and Consensus: HAL
Schlumberger Limited: Houston, TX-based Schlumberger helps upstream energy players locate oil and gas, as well as drill and evaluate hydrocarbon wells. Its greater reliance on the lucrative international market is appreciable. Although shares of the company have declined 2.5% in the past three months, Schlumberger — being the leading provider of technology for complex oilfield projects — is better positioned than most peers to take up new offshore projects in shallow water basins outside North America.
The company is likely to see earnings growth of 6.7% in the next five years. The Zacks Rank #3 company’s decision to cut quarterly dividend payments is likely to save cash outflows amid an unfavorable business scenario and enable it to navigate through the current uncertainties. Notably, the stock has seen massive upward estimate revision of its 2020 bottom line in the past 60 days.
Price and Consensus: SLB
Baker Hughes Company: Based in Houston, TX, this is one of the world’s largest oilfield service providers that sell technologies and services to different clients. It is well equipped with technologies to serve explorers focusing more on shale and offshore deep-water oil and gas rather than conventional production.
The Zacks Rank #3 company is likely to see earnings growth of 9.8% in the next five years. Although the stock has declined 16% in the past three months, the company’s plan to extend its reach beyond oil fields to capitalize on LNG contracts is commendable. Encouragingly, it has a strong balance sheet, which will provide the company with financial flexibility. Notably, the stock has seen no estimate revision for its 2020 bottom line in the past seven days.
Price and Consensus: BKR
TechnipFMC plc: Headquartered in London, U.K., it is a leading manufacturer and supplier of products, services and fully-integrated technology solutions for the energy industry. TechnipFMC’s strong backlog, which now stands at almost $22 billion, not only reflects steady demand from customers but also enables it to generate an unmatched level of earnings and provides cash flow visibility.
This Zacks Rank #3 company has an expected earnings growth rate of 22.4% for the next five years. Despite the stock’s decline of 13.1% in the past three months, the company’s cost-cutting initiatives that will likely yield more than $350 million in savings this year are commendable. The Zacks Consensus Estimate for 2020 earnings has been revised upward to 41 cents per share from 32 cents in the past 60 days.
Price and Consensus: FTI