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4 Oilfield Services Stocks for Solid Returns Despite Challenges

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Energy demand is witnessing a rapid recovery around the world from coronavirus-induced destruction. Even though the associated challenges have subsided due to multiple vaccine rollouts, the North American market is expected to witness tepid upstream growth, further marring the Zacks Oil and Gas- Field Services industry outlook.

Thankfully, the international market prospects for oilfield service providers have somewhat improved. Schlumberger Limited (SLB - Free Report) , Oceaneering International, Inc. (OII - Free Report) , Ranger Energy Services, Inc. (RNGR - Free Report) and Nine Energy Service, Inc. (NINE - Free Report) are among the frontrunners in the industry that are well placed to transcend the market woes.

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 as well as transport and directional solutions, among others. Also, the companies 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 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

Tepid Upstream Investments: Exploration and production (E&P) companies are now constrained by a reduction in borrowing capacity and an increase in the cost of capital. Despite the rising oil and gas prices, upstream players are facing constant pressure from investors for higher returns instead of rapid production growth. These headwinds are keeping investments from E&P firms in the land market of North America under check. Hence, conservative spending by clients and slow improvement in North American drilling are likely to hurt the demand for oilfield service providers like Baker Hughes Company (BKR - Free Report) . Lower volumes in the company’s Subsea Drilling Systems are affecting energy equipment demand.

Rising Competition: 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. Even though rig count is witnessing an improvement, lower completion activities and overcapacity are marring the prospects of companies like Halliburton Company (HAL - Free Report) . The current situation has forced these companies to cut costs and retain cash.

Building Resiliency: Oilfield service providers have resorted to balance sheet strengthening and sensitive capital expenditure, which will help them to survive any market downturn. The companies are depending on capital efficiency to increase cash retention and value generation from operations. These practices will enable them to thrive in the long term. The volatile market witnessed due to the coronavirus pandemic has ultimately heightened oilfield service providers' resiliency.

International Market Opportunities: While the domestic market is fighting its own battle, the international market can drive the growth of oilfield service providers through 2021-end and beyond. Regions like the Middle East, North Sea, Asia-Pacific and others are expected to provide opportunities to companies with major global presence. Strong relationships with big national oil companies around the world are enabling oilfield service firms to clinch long-term contracts. Also, with systematic production recovery from OPEC+ output cuts, the demand for drilling and completion activities is expected to rise in the coming days.

Zacks Industry Rank Indicates Bearish Outlook

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 #164, which places it in the bottom 35% 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 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, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500, Underperforms Sector

The Zacks Oil and Gas – Field Services industry has outperformed the Zacks S&P 500 composite over the past year but remained below the broader Zacks Oil – Energy sector.

The industry has risen 40.9% over this period compared with the S&P 500’s improvement of 31.3% and the broader sector’s 59.4% 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 13.91X compared with the S&P 500’s 15.58X and sector’s 5.15X.

Over the past five years, the industry has traded as high as 14.08X, as low as 1.91X, with a median of 9.30X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

4 Oilfield Services Stocks Trying to Fend Off Industry Challenges

Considering the current industry scenario, it might be prudent for investors to buy these four Zacks Rank #2 (Buy) stocks that are well placed to generate long-term growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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 rising 11.6% 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.

The company expects international revenues to witness double-digit growth in second-half 2021. Its bottom line is likely to jump 83.8% year over year for the current year. It has witnessed two upward estimate revisions in the past 60 days against none in the opposite direction. It beat earnings estimates in the past four quarters, with an average of 17.8%.

Price and Consensus: SLB

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 deepwater. It owns a geographically diversified asset base spread across the United States and the rest of the world. The company's revenue profile is evenly split between international and domestic operations, thereby lowering Oceaneering’s risk profile.

Its shares have jumped 22% in the past six months and are expected to rise even more on decarbonization technology and customized digital integration, which are likely to help the company outperform its peers. The company’s bottom line is likely to jump 140.7% year over year for the current year. It has witnessed three upward estimate revisions in the past 60 days versus none in the opposite direction. It beat earnings estimates thrice in the past four quarters while missing once, with an average surprise of 82.7%.

Price and Consensus: OII

Ranger Energy Services, Inc.: Headquartered in Houston, TX, Ranger Energy provides high-specification rigs to varied clients in the onshore United States. Also, it supplies equipment for well services like fluid pumps, power swivels and many more. The processing solution business that offers proprietary and modular equipment for natural gas processing is expected to make huge profits in the coming days as surging gas prices are likely to result in increased production. As such, the stock — which has jumped 71.7% in the past six months — is expected to climb even higher.

With rising activities expected in second-half 2021 and throughout 2020, the company’s profits are likely to surge in the coming days. In fact, its bottom line is expected to jump 106.8% year over year in the next year.

Price and Consensus: RNGR

Nine Energy Service, Inc.: Houston, TX-based Nine Energy provides advanced technology and services to support complex wells in North America, and internationally. Its Scorpion frac plugs are performing pretty well, thereby boosting completion business revenues. The stock has surged 67.8% in the past year and is well positioned to move even higher, with growth in coiled tubing services. Its highly engineered software provides better access to clients’ coiled tubing operations.

Its strong presence in major U.S. shale plays like Permian, Eagle Ford, Bakken, Marcellus and others bodes well for the company. Its bottom line is likely to jump 38.3% year over year for the current year. It has witnessed one upward estimate revision in the past 60 days with no movement in the opposite direction. It beat earnings estimates thrice in the past four quarters while missing once, with an average surprise of 82.7%.

Price and Consensus: NINE

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