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Stabilizing Oil Prices to Support Oilfield Services Industry
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The Zacks Oil and Gas- Oilfield Services industry comprises companies that primarily engage in providing support services to upstream players. These companies help in manufacturing, repairing and maintaining wells and drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among other services.
Let’s take a look at the industry’s three major themes:
Oil prices have an immense influence on the performance of oilfield services industry. Higher commodity prices boost the spending levels of upstream players as they can derive more value for their products. With oil drilling becoming profitable on commodity price uptick, oilfield services players can, in turn, charge more for their services. Conversely, if oil prices tumble, the oilfield services industry is likely to be one of the first ones to feel the pinch. Notably, following the oil crash toward the end of 2018 that caught everyone off guard, WTI crude popped up to $60.55 a barrel in the March quarter of 2019, witnessing the fastest rate of oil price increase since a decade. Recently, Brent benchmark hit a 5-month high on Libya conflicts, which tightened supply. With commodity prices bottoming out in late December 2018, oil prices have stabilized, underpinned mainly by OPEC+ supply cuts and U.S. sanctions against Venezuela and Iran, raising hopes for oil field services companies.
While global rig count drastically declined during 2014-2016, things have gradually picked up since 2017. Average global rig count witnessed year-over-year increase in both 2017 and 2018. The latest weekly data from Baker Hughes shows that oil and gas rig count in United States totaled 1025 for the week ended Apr 5, 2019, representing the first increase in seven weeks. Increasing rig counts signal improving upstream activity and therefore higher demand for oilfield services players. EIA expects output to rise 1.43 barrels per day (bpd) in 2019, up from 1.35 bpd projected earlier, signaling more work for oilfield services players. Improving offshore activities also boosted prospects of the oilfield services industry. Per Rystad Energy, the Big Oil firms are likely to green light 110 offshore projects in 2019, up from 96, 62 and 43 in 2018, 2017 and 2016, respectively. While this is certainly going to boost the demand for rigs, it will mostly benefit bigger oilfield service providers with an expertise in deepwater projects. Growing interest in deepwater exploration from South-East Asia and Asia Pacific is likely to offer promising opportunities to oilfield services companies.
Nonetheless, while demand for oilfield services is encouraging, the industry is struggling with competitively-priced backlog and reduced day rates, which have affected earnings and revenues of most companies. Notably, during the crude downturn, the upstream players invested in cost-cutting measures to keep drilling activities economical in the low-price environment. Investments in technological advancements, involving pad drilling and rig mobility, have led to efficiency gains for producers but softened revenues for oilfield services companies. Also, oilfield service providers are still reeling under debt burden and lower cash flows. Needless to say,while the large-cap firms are more poised to regain their credit strength, the smaller rivals are likely to go through a rougher patch.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Oil and Gas – Oilfield Services is a 37-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #82, which places it in the top 32% 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 solid 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.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have reposed faith in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined almost 18%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas –Oilfield Services industry has lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry dipped 17.1% over this period compared with the broader sector’s decline of 5.7%. The S&P 500has rallied 8.5% in the said time frame.
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 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 10.06X compared with the S&P 500’s 11.1X and the sector’s 5.11X.
Over the past five years, the industry has traded as high as 13.62X, as low as 5.35X, with a median of 8.77X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
With the energy sector emerging from a crude slump and prices on the rise, oilfield services activities have been picking up. Promising North American and offshore prospects bode well for the industry. While the industry is currently weighed down by low dayrates, with revved up production amid higher oil prices, the bargaining power in contract negotiation is likely to shift to oilfield service companies, which will be well positioned to earn higher fees for their services.
Meanwhile, the companies in the industry are likely to focus on expansion or addition of new market offerings, adoption of superior technologies, innovation of business processes, as well as integration of value chain offerings, acquisitions and profitable collaborations, among other strategic strides to boost their prospects.
We are presenting four stocks from the industry that have a Zacks Rank #2 (Buy). These stocks are well positioned to grow in the near term.
Ranger Energy Services, Inc. (RNGR - Free Report) : Houston-based Ranger Energy forecasts its 2019 earnings to witness year-over-year growth of 55.56%. The Zacks Consensus Estimate for current-year EPS has moved 11.1% north over the past 30 days.
Price and Consensus: RNGR
Archrock, Inc.(AROC - Free Report) : Headquartered in Houston, Archrock has an expected earnings growth of 39.5% for 2019. The Zacks Consensus Estimate for current-year EPS has moved up 26.4% over the past 60 days.
Price and Consensus: AROC
SEACOR Holdings, Inc.: Headquartered in Florida, SEACOR has an expected earnings growth rate of 1.7% for 2019. The Zacks Consensus Estimate for current-year EPS has moved up 11.5% over the past 60 days.
Price and Consensus: CKH
ProPetro Holding Corp.(PUMP - Free Report) : Texas-based, ProPetro forecasts its 2019 earnings to witness year-over-year growth of 21%.The Zacks Consensus Estimate for current-year EPS has moved up 3.4% over the past 30 days.
Price and Consensus: PUMP
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Stabilizing Oil Prices to Support Oilfield Services Industry
The Zacks Oil and Gas- Oilfield Services industry comprises companies that primarily engage in providing support services to upstream players. These companies help in manufacturing, repairing and maintaining wells and drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among other services.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Bright Prospects
The Zacks Oil and Gas – Oilfield Services is a 37-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #82, which places it in the top 32% 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 solid 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.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts have reposed faith in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined almost 18%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas –Oilfield Services industry has lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry dipped 17.1% over this period compared with the broader sector’s decline of 5.7%. The S&P 500has rallied 8.5% in the said time frame.
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 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 10.06X compared with the S&P 500’s 11.1X and the sector’s 5.11X.
Over the past five years, the industry has traded as high as 13.62X, as low as 5.35X, with a median of 8.77X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
With the energy sector emerging from a crude slump and prices on the rise, oilfield services activities have been picking up. Promising North American and offshore prospects bode well for the industry. While the industry is currently weighed down by low dayrates, with revved up production amid higher oil prices, the bargaining power in contract negotiation is likely to shift to oilfield service companies, which will be well positioned to earn higher fees for their services.
Meanwhile, the companies in the industry are likely to focus on expansion or addition of new market offerings, adoption of superior technologies, innovation of business processes, as well as integration of value chain offerings, acquisitions and profitable collaborations, among other strategic strides to boost their prospects.
We are presenting four stocks from the industry that have a Zacks Rank #2 (Buy). These stocks are well positioned to grow in the near term.
(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)
Ranger Energy Services, Inc. (RNGR - Free Report) : Houston-based Ranger Energy forecasts its 2019 earnings to witness year-over-year growth of 55.56%. The Zacks Consensus Estimate for current-year EPS has moved 11.1% north over the past 30 days.
Price and Consensus: RNGR
Archrock, Inc.(AROC - Free Report) : Headquartered in Houston, Archrock has an expected earnings growth of 39.5% for 2019. The Zacks Consensus Estimate for current-year EPS has moved up 26.4% over the past 60 days.
Price and Consensus: AROC
SEACOR Holdings, Inc. : Headquartered in Florida, SEACOR has an expected earnings growth rate of 1.7% for 2019. The Zacks Consensus Estimate for current-year EPS has moved up 11.5% over the past 60 days.
Price and Consensus: CKH
ProPetro Holding Corp.(PUMP - Free Report) : Texas-based, ProPetro forecasts its 2019 earnings to witness year-over-year growth of 21%.The Zacks Consensus Estimate for current-year EPS has moved up 3.4% over the past 30 days.
Price and Consensus: PUMP
Radical New Technology Creates $12.3 Trillion Opportunity .
Imagine buying Microsoft stock in the early days of personal computers… or Motorola after it released the world’s first cell phone. These technologies changed our lives and created massive profits for investors.
Today, we’re on the brink of the next quantum leap in technology. 7 innovative companies are leading this “4th Industrial Revolution” - and early investors stand to earn the biggest profits.
See the 7 breakthrough stocks now>>