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Offshore & Global Activities to Aid Oilfield Equipment Stocks

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The Zacks Oil and Gas- Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment, including production machinery, pumps, valves, along with several other drilling appliances like rigs and rig components to exploration and production companies. These help the upstream players in the extraction of oil from fields, both onshore and offshore.

Let’s take a look at the industry’s three major themes:

  • Crude prices have an immense influence on the performance of oil equipment industry. When oil drilling and production becomes profitable for exploration companies on the back of commodity price uptick, demand for equipment providers increases and their business prospects improve. As we know, after a major uptick in the early part of the year, oil prices hit a bump this month amid economic concerns and inventory overhang. However, with renewed trade-war resolution hopes, crude prices have started picking up again. Also, it is highly likely that the OPEC+ will decide to either stick to production cuts or extend them, at the meeting in Vienna next week. This will lead to stabilization of oil prices, thereby aiding oilfield equipment suppliers.

 

  • Conservative spending by U.S. oil explorers after the crude crash toward the end of last year has dented demand for oilfield services players including equipment providers. With lower capital spending, the number of rigs employed in the domestic plays is reducing by the day. In fact, rigs engaged in the exploration and production of oil and natural gas in the United States totaled 967 in the week ended Jun 21, per data provided by Baker Hughes, a GE company. With this, the tally has dropped in 10 of the past 11 weeks. With lower investments in drilling wells in North America, oilfield equipment manufacturers have been compelled to agree to cheaper rates. Also, most of the companies within the industry are still reeling under debt and lower cash flow. However, in response to the changing market dynamics, oilfield equipment providers are looking to continue their disciplined approach to capital spending, which may aid cash flow generation. Needless to say, while the large-cap firms are poised to regain their credit strength, the smaller ones are likely to go through a rough patch.

 

  • Despite conservative capital spending by U.S. explorers and producers, production volumes of oil and natural gas continue to increase. 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. While North America is expected to witness lower activity levels amid explorers’ tight budget, offshore and international prospects are showing signs of improvement. International activities, particularly in Latin America, including Mexico and Brazil are likely to pick momentum. Further, 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. These will certainly boost the demand for oil equipment suppliers. Growing interest in deepwater exploration from South-East Asia and Asia Pacific is likely to offer promising opportunities to oilfield services companies.

 

Zacks Industry Rank Indicates Bright Prospects

The Zacks Oil and Gas - Mechanical and Equipment is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #110, which places it in the top 43% 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.

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 Lags Sector and S&P 500

The Zacks Oil and Gas - Mechanical and Equipment industry has underperformed the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.

The industry has declined 45% in the past year compared with the broader sector’s decrease of 12.5%.  The S&P 500 has risen 7.2% in the same time frame.

One-Year Price Performance



Industry’s Current Valuation  

Since midstream-focused oil and gas partnerships use fixed rate debt for the majority of their borrowings, 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 4.75X, lower than the S&P 500’s 11.29X. It is also lower than sector’s trailing-12-month EV/EBITDA of 4.96X.

Over the past five years, the industry has traded as high as 21.17X, as low as 2.60X, with a median of 5.33X.

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

 




Bottom Line

While the industry is currently weighed down by pricing pressure and tepid activities in North America amid tight capex of U.S. explorers, recovering international and offshore prospects are major positives. The momentum in the offshore and international activities is likely to continue in the near term, bolstering the performance of oilfield equipment manufacturers.

Further, sector consolidation, adoption of superior technologies, new operational systems’ optimization of the fleet by strategic sell-offs and acquisition and profitable collaborations among other strategic strides will boost future prospects of the mechanical and equipment industry.

We are presenting one stock with a Zacks Rank #1 (Strong Buy) and three Zacks Rank #2 (Buy) companies that are poised for growth.

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

Forum Energy Technologies, Inc. (FET - Free Report) : This Zacks Rank #1 company’s 2019 sales are expected to witness year-over-year growth of 5%.

Price and Consensus: FET




NOW Inc. (DNOW - Free Report) : This Zacks Rank #2 company has an expected earnings growth rate of 19.4% for 2019.

Price and Consensus: DNOW



Superior Drilling Products, Inc. (SDPI - Free Report) : This Zacks Rank #2 company has an expected revenue growth of rate 20.8% 2019.

Price and Consensus: SDPI


 
Oil States International, Inc. (OIS - Free Report) :
The Zacks Rank #2 company is expected to witness year-over-year growth of 3% in sales in 2019.

Price and Consensus: OIS



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