The coronavirus pandemic has caused massive global energy demand destruction since early 2020. Even though the challenges in the path of energy demand growth have subsided due to multiple vaccine rollouts, the North American market is expected to witness tepid upstream growth. Inflation fears further marred the Zacks
Oil and Gas- Field Services industry outlook. However, international market prospects for oilfield service providers have somewhat improved. Schlumberger Limited ( SLB Quick Quote SLB - Free Report) , Baker Hughes Company ( BKR Quick Quote BKR - Free Report) , Halliburton Company ( HAL Quick Quote HAL - Free Report) , Oceaneering International, Inc. ( OII Quick Quote OII - Free Report) and Smart Sand, Inc. ( SND Quick Quote SND - Free Report) are among the frontrunners in the industry that are trying to transcend coronavirus blues. 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 as well as drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among others. Also, the companies help upstream energy players to locate oil and gas, and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream companies. Importantly, with countries around the world 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 that are used in LNG facilities to decrease carbon emissions.
4 Trends Defining Oilfield Services Industry's Future
Investors are closely watching the inflation indicators as prices continue to rise. Any unfavorable inflation data read might trigger an interest hike by the Fed, which will result in disruption of the ongoing economic growth recovery. This, in turn, can affect fuel demand. Moreover, the second wave of COVID-19 infections is affecting several European markets and major economies in Asia, triggering further lockdowns and a decline in energy demand. The situation is keeping energy exports under check. Therefore, the demand for oil and gas is under pressure, making oilfield services companies’ outlook gloomy. Inflation & Pandemic Worries: Exploration and production companies are now constrained by a reduction in borrowing capacity and an increase in the cost of capital. Also, explorers are facing constant pressure from their investors for higher returns instead of rapid production growth. These headwinds are keeping investments from upstream players in the land market of North America under check. Hence, conservative spending by clients and weak North American drilling are likely to hurt the demand for oilfield service providers like Tepid Upstream Investments: TechnipFMC plc ( FTI Quick Quote FTI - Free Report) . This London-based company’s Surface Technologies segment is facing the brunt of weak North American drilling operations and unfavorable product mix. With scaled down upstream investment, the existing oilfield services companies are fighting hard for the available funds. As a result, intensified competition in the domestic market has left limited room for oilfield services providers to charge premium prices for the services being offered. Moreover, the slowdown of demand for pressure pumping services in the U.S. shale plays last year marred the prospects of several companies like RPC, Inc. Rising Competition:
While the domestic market is expected to fight its own battle, the international market can drive growth for oilfield service providers through 2021-end and beyond. Regions like the Middle East, North Sea and others are expected to provide opportunities to companies with major global presence. For example, Schlumberger — which has lost some opportunities in Saudi Arabia due to OPEC+ production cuts — will likely be able to offset the negatives with rising activities in Kuwait and Qatar. Moreover, investments in North Sea activities from producers like Equinor and Apache are expected to increase. International Market Opportunities: Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 26-stock group within the broader Zacks
Oil - Energy sector. The industry currently carries a Zacks Industry Rank #176, which places it in the bottom 29% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull 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 Outperforms Sector and S&P 500
The Zacks Oil and Gas - Field Services industry has outperformed the broader Zacks Oil - Energy sector and Zacks S&P 500 composite over the past year.
The industry has risen 53.8% over this period compared with the S&P 500’s improvement of 40.1% and broader sector’s 29.8% rally.
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 11.56X compared with the S&P 500’s 17.16X and sector’s 5.06X.
Over the past five years, the industry has traded as high as 13.74X, as low as 1.91X, with a median of 9.30X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
5 Oilfield Services Stocks Trying to Fend Off Industry Challenges
Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while, or buying two Zacks Rank #2 (Buy) stocks and holding on to three fundamentally-sound Zacks Rank #3 (Hold) stocks.
Oceaneering International, Inc.: Headquartered in Houston, TX, the company provides specialized products and services for all phases of the offshore oilfield lifecycle, from exploration to decommissioning, with a focus on deep water. It owns a geographically-diversified asset base spread across the United States and rest of the world. The company's revenue profile is evenly split between international and domestic operations, thereby lowering Oceaneering’s risk profile. This Zacks Rank #2 company’s bottom line is likely to jump 92.6% year over year in the current year. It has witnessed three upward estimate revisions in the past 60 days versus none in the opposite direction. Price and Consensus: OII
Smart Sand, Inc.: Headquartered in The Woodlands, TX, Smart Sand provides frac sand to multiple range of clients. Moreover, it provides a wellsite proppant storage solution named SmartSystems and other logistics services. At 2020-end, it had a massive proven recoverable sand reserves of 315 million tons. The company’s sales figures are expected to significantly jump this year as it caters to the need of both upstream companies and other oilfield services firms. The stock, currently carrying a Zacks Rank #2, has seen upward earnings estimate revisions for 2021 in the past 30 days. Notably, it beat earnings estimates thrice and met once in the past four quarters, with an average surprise of 46.2%. Price and Consensus: SND
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. With shares of the company surging 51.8% in the past six months, Schlumberger — a 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.This Zacks Rank #3 company expects international revenues to witness double-digit growth in second-half 2021. Notably, its bottom line is likely to jump 61.8% year over year in the current year. It has witnessed 10 upward estimate revisions in the past 60 days against one in the opposite direction. Price and Consensus: SLB
Halliburton Company: Houston, TX-based Halliburton 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. With the stock jumping 34.3% in the past six months, this Zacks Rank #3 company’s core strength in providing best-in-class cementing, stimulation, intervention and completion services bolsters prospects. Its bottom line for 2021 is expected to grow 50.8% year over year. Price and Consensus: HAL Baker Hughes Company: Based in Houston, TX, this is one of the world’s largest oilfield service providers selling 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 stock has increased 29.1% in the past six months and has more room for growth. This Zacks Rank #3 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 four upward estimate revisions and one downward movement for the 2021 bottom line in the past 60 days. Price and Consensus: BKR
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