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4 Oil & Gas Equipment Stocks to Transcend Coronavirus Blues
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The coronavirus pandemic has caused massive energy demand destruction all around the globe. Challenges in the path of demand growth and an oversupplied market are weighing on commodity prices, keeping them in the bearish territory. The situation has further marred the outlook of the Zacks Oil and Gas- Mechanical and Equipment industry.
However, with people gradually returning to work with the easing of lockdown measures, prospects for energy suppliers and oilfield equipment players have somewhat improved. National Oilwell Varco, Inc. (NOV - Free Report) , Dril-Quip, Inc. (DRQ - Free Report) , USA Compression Partners, LP (USAC - Free Report) and NOW Inc. (DNOW - Free Report) are among the frontrunners in the industry that are trying to survive the challenging business scenario.
Industry Description
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 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.
Low Oil Price: Although crude oil price has recovered partially in the past few months, the commodity’s price has significantly declined since the start of the year, when West Texas Intermediate (WTI) crude price was trading above the $60 per barrel mark. Dented crude price on account of the coronavirus has forced most upstream companies to cut capital spending budget. The situation has reduced demand for oilfield equipment service providers. Importantly, the unfavorable pricing scenario of the commodity is unlikely to improve, especially in the short term, unless the world gets an effective coronavirus vaccine.
Rig Count Down Y/Y: Curtailment in operations by explorers has become quite apparent as drillers have been removing rigs from domestic and international markets. Per data provided by Baker Hughes Company (BKR - Free Report) , rig count is down 517 rigs year over year in the United States. Moreover, the international market has witnessed a year-over-year decline in the rig count by 474 units. The decreased rig count indicates low demand for the services provided by oilfield equipment suppliers. Although there has been a resumption of upstream activities in the U.S. shale plays in the past few months, exploration and production companies are playing defensively. Instead of focusing on production rise, the companies are now prioritizing on sensitive capital allocation and value increase for investors. As such, the oilfield equipment industry outlook seems gloomy.
Tepid Offshore Opportunities: Given the current bearish crude price environment, producers are keener on focusing on onshore drilling, wherein costs associated with drilling is much lower than that of offshore expenses. Hence, even though the overall energy market is currently witnessing some improvements, the subsea equipment market demand outlook is anything but encouraging. Capital equipment bookings for the offshore market are yet to witness a substantial turnaround amid the current uncertain market. With no real chance of upstream capex cut reversal this year, the situation is not likely to improve anytime soon.
Internal Improvements: To navigate through the current market volatility, oilfield equipment providers have adopted measures to strengthen the balance sheet and reduce capital expenditure. This is likely to help the companies survive the market downturns, which is a major positive. Oilfield equipment providers will depend on capital efficiency enhancement 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 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #233, which places it in the bottom 6% 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 outperforms 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have moved 189.7% downward in the past year, the same for 2021 have slumped 237%.
Before we present a few stocks that you may want to 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 Lags 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 43.7% in the past year compared with the broader sector’s decrease of 35.8%. The S&P 500, in contrast, has risen 15.1% 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 1.98X, lower than the S&P 500’s 15.67X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.47X.
Over the past five years, the industry has traded as high as 25.48X, as low as 0.84X, with a median of 5.11X.
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 four fundamentally-sound Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
National Oilwell Varco: This Houston, TX-based company is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, as well as equipment used in oil and gas drilling and production worldwide. The company's large installed base of rigs on a worldwide basis provides it with a steady recurring revenue stream driven by demand for maintenance, parts and other expendable products. The company is also a global leader in solids control technology and waste management. National Oilwell Varco has ample liquidity, with cash and cash equivalents of nearly $1.5 billion and $2 billion available in the revolving credit facility, which is enough to manage long-term debt of $1.8 billion. Its bottom line is expected to grow 90.3% year over year in 2020.
Price and Consensus: NOV
Dril-Quip: This Delaware corporation manufactures highly-engineered offshore drilling and production equipment for deep-water severe-service applications, and harsh environmental conditions. The company’s products are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. To navigate through the current market uncertainty owing to the coronavirus pandemic, it has been focusing strongly on cost-reduction initiatives. Notably, the stock has seen six upward estimate revisions and no downward movement for its 2020 bottom line in the past 30 days.
Price and Consensus: DRQ
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 in 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. As such, the firm is largely insulated to fluctuations in commodity prices. Its bottom line is expected to grow 96.5% year over year in 2021.
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 $195 million free cash flow in the trailing 12-month period. Notably, the stock has seen three upward estimate revisions and one downward movement for its 2021 bottom line in the past 30 days. Earnings per share are expected to grow 44.4% year over year in 2021.
Price and Consensus: DNOW
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
Image: Bigstock
4 Oil & Gas Equipment Stocks to Transcend Coronavirus Blues
The coronavirus pandemic has caused massive energy demand destruction all around the globe. Challenges in the path of demand growth and an oversupplied market are weighing on commodity prices, keeping them in the bearish territory. The situation has further marred the outlook of the Zacks Oil and Gas- Mechanical and Equipment industry.
However, with people gradually returning to work with the easing of lockdown measures, prospects for energy suppliers and oilfield equipment players have somewhat improved. National Oilwell Varco, Inc. (NOV - Free Report) , Dril-Quip, Inc. (DRQ - Free Report) , USA Compression Partners, LP (USAC - Free Report) and NOW Inc. (DNOW - Free Report) are among the frontrunners in the industry that are trying to survive the challenging business scenario.
Industry Description
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 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
Low Oil Price: Although crude oil price has recovered partially in the past few months, the commodity’s price has significantly declined since the start of the year, when West Texas Intermediate (WTI) crude price was trading above the $60 per barrel mark. Dented crude price on account of the coronavirus has forced most upstream companies to cut capital spending budget. The situation has reduced demand for oilfield equipment service providers. Importantly, the unfavorable pricing scenario of the commodity is unlikely to improve, especially in the short term, unless the world gets an effective coronavirus vaccine.
Rig Count Down Y/Y: Curtailment in operations by explorers has become quite apparent as drillers have been removing rigs from domestic and international markets. Per data provided by Baker Hughes Company (BKR - Free Report) , rig count is down 517 rigs year over year in the United States. Moreover, the international market has witnessed a year-over-year decline in the rig count by 474 units. The decreased rig count indicates low demand for the services provided by oilfield equipment suppliers. Although there has been a resumption of upstream activities in the U.S. shale plays in the past few months, exploration and production companies are playing defensively. Instead of focusing on production rise, the companies are now prioritizing on sensitive capital allocation and value increase for investors. As such, the oilfield equipment industry outlook seems gloomy.
Tepid Offshore Opportunities: Given the current bearish crude price environment, producers are keener on focusing on onshore drilling, wherein costs associated with drilling is much lower than that of offshore expenses. Hence, even though the overall energy market is currently witnessing some improvements, the subsea equipment market demand outlook is anything but encouraging. Capital equipment bookings for the offshore market are yet to witness a substantial turnaround amid the current uncertain market. With no real chance of upstream capex cut reversal this year, the situation is not likely to improve anytime soon.
Internal Improvements: To navigate through the current market volatility, oilfield equipment providers have adopted measures to strengthen the balance sheet and reduce capital expenditure. This is likely to help the companies survive the market downturns, which is a major positive. Oilfield equipment providers will depend on capital efficiency enhancement 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 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #233, which places it in the bottom 6% 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 outperforms 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have moved 189.7% downward in the past year, the same for 2021 have slumped 237%.
Before we present a few stocks that you may want to 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 Lags 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 43.7% in the past year compared with the broader sector’s decrease of 35.8%. The S&P 500, in contrast, has risen 15.1% 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 1.98X, lower than the S&P 500’s 15.67X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.47X.
Over the past five years, the industry has traded as high as 25.48X, as low as 0.84X, with a median of 5.11X.
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 four fundamentally-sound Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
National Oilwell Varco: This Houston, TX-based company is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, as well as equipment used in oil and gas drilling and production worldwide. The company's large installed base of rigs on a worldwide basis provides it with a steady recurring revenue stream driven by demand for maintenance, parts and other expendable products. The company is also a global leader in solids control technology and waste management. National Oilwell Varco has ample liquidity, with cash and cash equivalents of nearly $1.5 billion and $2 billion available in the revolving credit facility, which is enough to manage long-term debt of $1.8 billion. Its bottom line is expected to grow 90.3% year over year in 2020.
Price and Consensus: NOV
Dril-Quip: This Delaware corporation manufactures highly-engineered offshore drilling and production equipment for deep-water severe-service applications, and harsh environmental conditions. The company’s products are used by major integrated, large independent and foreign national oil and gas companies in offshore areas throughout the world. To navigate through the current market uncertainty owing to the coronavirus pandemic, it has been focusing strongly on cost-reduction initiatives. Notably, the stock has seen six upward estimate revisions and no downward movement for its 2020 bottom line in the past 30 days.
Price and Consensus: DRQ
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 in 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. As such, the firm is largely insulated to fluctuations in commodity prices. Its bottom line is expected to grow 96.5% year over year in 2021.
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 $195 million free cash flow in the trailing 12-month period. Notably, the stock has seen three upward estimate revisions and one downward movement for its 2021 bottom line in the past 30 days. Earnings per share are expected to grow 44.4% year over year in 2021.
Price and Consensus: DNOW
Just Released: Zacks’ 7 Best Stocks for Today
Experts extracted 7 stocks from the list of 220 Zacks Rank #1 Strong Buys that has beaten the market more than 2X over with a stunning average gain of +24.3% per year.
These 7 were selected because of their superior potential for immediate breakout.
See these time-sensitive tickers now >>