Strict capital discipline among upstream energy companies is reducing the demand for oilfield services, resulting in a gloomy forecast for the Zacks Oil and Gas- Field Services industry. The success of firms in this industry heavily relies on their ability to adeptly manage the shifting landscape of energy transition. As a result, not achieving energy transition goals will adversely impact their cash flow.

Among the companies in the industry that are likely to survive the business challenges are Halliburton Company (HAL Quick QuoteHAL - Free Report) , TechnipFMC plc (FTI Quick QuoteFTI - Free Report) and Weatherford International plc (WFRD Quick QuoteWFRD - 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

Highly Volatile Business: The demand for oilfield services is predominantly tied to exploration and production activities. Given the reliance of oil explorers and producers on the volatile commodity pricing landscape, the business of oilfield service companies is susceptible to uncertainty.  

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.

Impacts of Failing Energy Transition Goals on Cashflows: The prosperity of companies within the industry hinges greatly on their adeptness in navigating the evolving energy transition landscape. This encompasses the ability of oilfield service providers to efficiently tackle the decarbonization of oil and gas operations while expanding the adoption of inventive, low-carbon and carbon-neutral technologies. Consequently, falling short of energy transition objectives will have repercussions on their cash flow.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil and Gas – Field Services is a 20-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #204, which places it in the bottom 17% 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 Outperforms S&P 500 & Sector

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

The industry has jumped 64.4% over this period compared with the S&P 500’s rise of 25.1% and the broader sector’s 28.2% 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 9.62X compared with the S&P 500’s 18.08X and the sector’s 6.78X.

Over the past five years, the industry has traded as high as 17.81X and as low as 5.91X, with a median of 7.93X.

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

3 Oilfield Services Stocks to Watch

Halliburton is also benefiting from the ongoing high prices of oil. This is because the company, carrying a Zacks Rank #3 (Hold), provides services and equipment to explorers and producers to maximize upstream operations, starting from drilling, completing and even shutting down of oil and gas wells.

Price and Consensus: HAL

TechnipFMC, being a leading provider of technology, equipment and services to the upstream players for extracting resources efficiently while reducing costs, is well-positioned to capitalize on the high oil prices. With exploration and production activities remaining favorable, demand for FTI’s services is likely to continue growing. With its activities spreading across Subsea and Surface Technologies, the company, with a Zacks Rank of 3, is strongly positioned to gain on both onshore and offshore operations. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: FTI

Weatherford International, a leading energy player, is likely to benefit from high oil prices. This is because the company, carrying a Zacks Rank #3, helps explorers and producers in getting optimal oil and gas from the fields. Since oil is still in its glorious days, increased upstream operations will likely drive the rise in demand for WFRD’s oilfield services.

Price and Consensus: WFRD