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Explorers' Tight Capex to Hurt Oilfield Services Industry
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The Zacks Oil and Gas- Field 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. The bearish outlook for oil price amid widespread fear of economic slowdown is denting the business of upstream players, thereby impacting oilfield services players. Rather than boosting their output and expanding drilling operations, producers are now more focused on returns. U.S. shale explorers are expected to further trim their capex this year owing to macroeconomic headwinds, thereby denting demand for oilfield service players. With oilfield companies idling more equipment and drilling contractors expected to run fewer rigs in the remainder of 2019, things do not look bright for the industry. In its latest earnings release, oilfield service major Halliburton (HAL - Free Report) stated that it will continue to idle equipment in the coming periods.
After losing its pricing power following the crude slump in mid-2014, the oilfield service industry has been struggling with reduced day rates and diminishing backlogs, which have affected earnings and revenues of most companies. Notably, during the oil downturn, 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. Many oilfield service firms are also suffering due to older equipment. Companies that cannot afford to invest in new machinery are bound to lose the race.
On a further discouraging note, oilfield service providers are reeling under heavy debt burden and lower cash flows. Staggering debt levels weigh on their near-term credit quality and make survival difficult in the competitive market. Needless to say, while the large-cap firms are more poised to regain their credit strength, the smaller players are likely to go through a rough patch.
Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Oil and Gas – Field Services is a 56-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #200, which places it in the bottom 22% 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 tepid 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined almost 33.3%.
Before we present a few stocks that you may want to consider despite the headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Mirrors Sector, Lags S&P 500
The Zacks Oil & Gas Field Services industry has been almost on par with the broader Zacks Oil - Energy sector but has lagged the Zacks S&P 500 composite over the past year.
The industry has lost 23.9% over this period compared with the S&P 500’s decline of 0.4% and the broader sector’s fall of 23.8%
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 8.93X, compared with the S&P 500’s 10.71X and the sector’s 4.59X.
Over the past five years, the industry has traded as high as 13.66X, as low as 5.43X, with a median of 8.93X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The oilfield services industry has been hit hard by contraction of activities and revenues, cancellation or renegotiation of contracts at lower day rates, along with massive layoffs. Nonetheless, oilfield services companies— which are the backbone of the oil and gas sector — have realized that the market dynamics have changed and are preparing to survive the ultra-competitive scenario. While the near-term picture does not look rosy, the oilfield services industry is likely to rise from the ashes in the coming years, given its focus on adapting to the current market scenario.
Following cheaper rates and intense competition in the oilfield service space, the companies are looking for mergers and consolidations to expand market share. The emphasis should be on transactions that are strategic. For instance, the recent CJ-Keane deal is a prudent pact as it creates the largest pressure pumper in the United States.
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 will help lift declining margins of oilfield service firms and enable them to perform better.
However, there are a few stocks in the Zacks Oil and Gas-Oilfield Services industry, which investors can consider given their solid growth prospects.
Schlumberger (SLB - Free Report) : This Texas-based Ranked #3 player forecasts its 2019 earnings to witness year-over-year growth of 1.7%.
Baker Hughes : This Texas-based Ranked #3 player is expected to witness year-over-year earnings growth of 6.8% in 2019.
TechnipFMC (FTI - Free Report) : This London-based Ranked #3 player forecasts its 2019 earnings to witness year-over-year growth of 6.9%.
Legalizing THIS Could Be Even Bigger than Marijuana
Americans spend an estimated $150 billion in this industry every year… more than twice as much as they spend on marijuana.
Now that 8 states have fully-legalized it (with several more states following close behind), Zacks has identified 5 stocks that could soar in response to the powerful demand. One industry insider described the future as “mind-blowing” – and early investors can still get in ahead of the surge.
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Explorers' Tight Capex to Hurt Oilfield Services Industry
The Zacks Oil and Gas- Field 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 Cloudy Prospects
The Zacks Oil and Gas – Field Services is a 56-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #200, which places it in the bottom 22% 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 tepid 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined almost 33.3%.
Before we present a few stocks that you may want to consider despite the headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Mirrors Sector, Lags S&P 500
The Zacks Oil & Gas Field Services industry has been almost on par with the broader Zacks Oil - Energy sector but has lagged the Zacks S&P 500 composite over the past year.
The industry has lost 23.9% over this period compared with the S&P 500’s decline of 0.4% and the broader sector’s fall of 23.8%
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 8.93X, compared with the S&P 500’s 10.71X and the sector’s 4.59X.
Over the past five years, the industry has traded as high as 13.66X, as low as 5.43X, with a median of 8.93X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The oilfield services industry has been hit hard by contraction of activities and revenues, cancellation or renegotiation of contracts at lower day rates, along with massive layoffs. Nonetheless, oilfield services companies— which are the backbone of the oil and gas sector — have realized that the market dynamics have changed and are preparing to survive the ultra-competitive scenario. While the near-term picture does not look rosy, the oilfield services industry is likely to rise from the ashes in the coming years, given its focus on adapting to the current market scenario.
Following cheaper rates and intense competition in the oilfield service space, the companies are looking for mergers and consolidations to expand market share. The emphasis should be on transactions that are strategic. For instance, the recent CJ-Keane deal is a prudent pact as it creates the largest pressure pumper in the United States.
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 will help lift declining margins of oilfield service firms and enable them to perform better.
However, there are a few stocks in the Zacks Oil and Gas-Oilfield Services industry, which investors can consider given their solid growth prospects.
Linde plc (LIN - Free Report) : This Guildford-based oilfield service provider carries a Zacks Rank #2 (Buy). The firm has an expected earnings growth rate of 91.6% for 2019. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
Schlumberger (SLB - Free Report) : This Texas-based Ranked #3 player forecasts its 2019 earnings to witness year-over-year growth of 1.7%.
Baker Hughes : This Texas-based Ranked #3 player is expected to witness year-over-year earnings growth of 6.8% in 2019.
TechnipFMC (FTI - Free Report) : This London-based Ranked #3 player forecasts its 2019 earnings to witness year-over-year growth of 6.9%.
Legalizing THIS Could Be Even Bigger than Marijuana
Americans spend an estimated $150 billion in this industry every year… more than twice as much as they spend on marijuana.
Now that 8 states have fully-legalized it (with several more states following close behind), Zacks has identified 5 stocks that could soar in response to the powerful demand. One industry insider described the future as “mind-blowing” – and early investors can still get in ahead of the surge.
See these 5 “sin stocks” now >>