While oil prices remain favorable, they are still significantly below 2022 levels, likely dampening demand for drilling and production equipment. This creates a challenging outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.

Additionally, demand for offshore drilling equipment is expected to decline modestly early next year. Companies striving to navigate these industry challenges include NOV Inc (NOV Quick QuoteNOV - Free Report) , Kodiak Gas Services, Inc. (KGS Quick QuoteKGS - Free Report) and Matrix Service Company (MTRX Quick QuoteMTRX - Free Report) .

About the Industry

The Zacks Oil and Gas - Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment — production machinery, pumps, valves and several other drilling appliances like rig components — to exploration and production companies. These help upstream energy players extract crude oil and natural gas from fields, both onshore and offshore. Hence, the well-being of oilfield equipment businesses is positively correlated to expenditures by upstream companies. These companies receive deals from integrated energy firms and independent as well as national oil and gas companies. Oilfield equipment providers also design, manufacture, engineer and install products used to treat and process crude oil, natural gas and others. Their products comprise gadgets and instruments for gas compression packages and water treatment works.

What's Shaping the Future of the Oil & Gas Equipment Industry?

Drilling & Production Equipment Demand to Decline: Despite the favorable crude prices, the possibility of the commodity price hitting $100 per barrel, like in 2022, is almost negligible. Also, the U.S. Energy Information Administration (“EIA”) expects a slowdown in GDP growth in 2024 and next year. This decline in economic activity will likely result in reduced exploration and production activities, consequently leading to diminished demand for drilling and production equipment for companies in the industry.

Lower Production Growth Rate: Investors are askingexploration and production companies to focus more on shareholders’ returns rather than solely allocating capital for the production of oil and gas. This is reducing the growth rate of production, thus hurting drilling & production equipment demand.

Impact of Uncontracted Periods on Offshore Drilling Equipment Demand: The demand for offshore drilling equipment across the industry is anticipated to decrease modestly in early 2025 due to the "white space" effect—periods of uncontracted time in drilling contractor schedules. This has led to delayed rig upgrades and reduced near-term expenditures.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Oil and Gas - Mechanical and Equipment is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #186, which places it in the bottom 26% 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 outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms Sector, Lags S&P 500

The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector but lagged the Zacks S&P 500 composite over the past year.

The industry has rallied 21% in the past year compared with the broader sector’s improvement of 16.5% and the S&P 500’s 34.2% increase.

One-Year Price Performance

Industry's Current Valuation

Since oilfield equipment providers are debt-laden, valuing them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio makes sense. 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 9.25X, lower than the S&P 500’s 18.87X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 3.64X.

Over the past five years, the industry has traded as high as 44.07X and as low as 0.9X, with a median of 10.09X.

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

3 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges

Matrix Service: It is well-known for providing engineering and construction services to the energy and industrial markets. Matrix, carrying a Zacks Rank of 3 (Hold), has witnessed sustained momentum in project awards,  helping it secure incremental cashflows. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: MTRX

NOV Inc:  NOV's technology is making significant progress internationally, particularly in offshore production and unconventional developments in the Middle East and Argentina. Notably, the backlog of the company for offshore production-related equipment has reached its highest level in over five years, driven by strong orders from energy projects. It carries a Zacks Rank of 3.

Price and Consensus: NOV

Kodiak Gas Services: As a well-known natural gas contract compression service provider, Kodiak Gas Services is strongly footed to gain from increasing clean energy demand. The stock, carrying a Zacks Rank 3, is likely to see earnings growth of more than 179% this year.

Price and Consensus: KGS