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4 Oilfield Services Stocks Set to Escape Industry Weakness
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Inflation is still high, resulting in increased costs for well completion and production activities. This is hurting the bottom line of oilfield service players. Strict capital discipline by upstream energy companies is also acting as a dampener, making the outlook for the Zacks Oil and Gas- Field Services industry gloomy. Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Weatherford International plc (WFRD - Free Report) and Oceaneering International, Inc. (OII - Free Report) .
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 and transport and directional solutions, among others. Also, the firms 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 worldwide 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 used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Inflation Remains Elevated: Persistently high inflation levels and the slim likelihood of reverting to pre-pandemic conditions in the short term are contributing to increased costs for well completion and production activities, as well as drilling and evaluation services. This is hurting the bottom line of oilfield services players.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Low Dividend Yield: While companies in the industry prioritize returning capital to shareholders, oilfield service players have consistently offered lower dividend yields than the broader energy sector in the last three years. This poses a challenge for investors seeking steady income from their investments.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 23-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #172, which places it in the bottom 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 gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.
The industry has jumped 0.6% over this period compared with the S&P 500’s rise of 25.3% and the broader sector’s 3.9% growth.
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 7.63X compared with the S&P 500’s 13.80X and sector’s 3.70X.
Over the past five years, the industry has traded as high as 12.37X and as low as 1.00X, with a median of 8.16X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Trying to Survive the Industry Challenges
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 18.8% this year.
Price and Consensus: SLB
Weatherford is a key energy player and is engaged in offering exclusive drilling technologies that will maximize clients’ reservoir exposure. Weatherford, with a Zacks Rank of 3, is also involved in well construction and completion activities in an efficient manner.
Halliburton Company: Halliburton is also a leading oilfield service player, capitalizing on improving demand for oilfield services. HAL expects oilfield service demand to remain strong, which will aid it in generating significant cashflows this year. This will help the Zacks #3 Ranked company to continue to return capital to shareholders and lower its debt burden.
Price and Consensus: HAL
Oceaneering International: Oceaneering is banking on improvement in pricing in the Offshore Projects Group and Subsea Robotics business segments. Operating results from the company’s Aerospace and Defense Technologies are also aiding the bottom line.
OII, sporting a Zacks Rank #1, is likely to see earnings growth of more than 76% this year.
Price and Consensus: OII
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4 Oilfield Services Stocks Set to Escape Industry Weakness
Inflation is still high, resulting in increased costs for well completion and production activities. This is hurting the bottom line of oilfield service players. Strict capital discipline by upstream energy companies is also acting as a dampener, making the outlook for the Zacks Oil and Gas- Field Services industry gloomy.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Weatherford International plc (WFRD - Free Report) and Oceaneering International, Inc. (OII - Free Report) .
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 and transport and directional solutions, among others. Also, the firms 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 worldwide 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 used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Inflation Remains Elevated: Persistently high inflation levels and the slim likelihood of reverting to pre-pandemic conditions in the short term are contributing to increased costs for well completion and production activities, as well as drilling and evaluation services. This is hurting the bottom line of oilfield services players.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Low Dividend Yield: While companies in the industry prioritize returning capital to shareholders, oilfield service players have consistently offered lower dividend yields than the broader energy sector in the last three years. This poses a challenge for investors seeking steady income from their investments.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 23-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #172, which places it in the bottom 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 gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.
The industry has jumped 0.6% over this period compared with the S&P 500’s rise of 25.3% and the broader sector’s 3.9% growth.
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 7.63X compared with the S&P 500’s 13.80X and sector’s 3.70X.
Over the past five years, the industry has traded as high as 12.37X and as low as 1.00X, with a median of 8.16X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Trying to Survive the Industry Challenges
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 18.8% this year.
Price and Consensus: SLB
Weatherford is a key energy player and is engaged in offering exclusive drilling technologies that will maximize clients’ reservoir exposure. Weatherford, with a Zacks Rank of 3, is also involved in well construction and completion activities in an efficient manner.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: WFRD
Halliburton Company: Halliburton is also a leading oilfield service player, capitalizing on improving demand for oilfield services. HAL expects oilfield service demand to remain strong, which will aid it in generating significant cashflows this year. This will help the Zacks #3 Ranked company to continue to return capital to shareholders and lower its debt burden.
Price and Consensus: HAL
Oceaneering International: Oceaneering is banking on improvement in pricing in the Offshore Projects Group and Subsea Robotics business segments. Operating results from the company’s Aerospace and Defense Technologies are also aiding the bottom line.
OII, sporting a Zacks Rank #1, is likely to see earnings growth of more than 76% this year.
Price and Consensus: OII