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Will Global Prospects Rescue Oil & Gas Equipment Industry?
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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 rig components — to exploration and production companies. These help the upstream players in the extraction of oil and natural gas from fields, both onshore and offshore.
Let’s take a look at the industry’s three major themes:
Oil prices continue to be in the bearish territory as demand for energy remains low owing to a slowdown in global economic growth. Moreover, the coronavirus outbreak has crippled China’s economy, the largest crude importer. Although the unfavorable business environment is expected to be short-lived, the situation has put a downward pressure on oil prices, thereby weakening OPEC’s efforts to improve the scenario. Thus, explorers and producers are not getting incentives to produce crude volumes on a massive scale. Hence, with lower growth in crude production, demand for oilfield equipment is likely to remain soft.
Drillers in North America have been spending conservatively since the beginning of last year. This is because investors are demanding explorers to return more capital instead of focusing solely on production growth. Eventually, drilling activities have slowed down as more and more rigs are being removed from oil and gas fields in the continent. In fact, rigs in the United States totaled 790 as of Feb 28, 2020, down by 248 year over year, per data provided by Baker Hughes Company (BKR - Free Report) . The slowdown in drilling operations has further clouded the outlook for oilfield equipment contracts.
Promising outlook for oilfield equipment suppliers in the international market and offshore prospects are likely to partially make up for weak North American operations. Not only drillers in international resources are employing more rigs but also there has been an increase in the number of final investment decision approvals for new E&P projects in markets outside North America. Notably, the number of rigs in the international market rose by 54 from January 2019 to 1,078 in the first month of 2020. Thus, for companies outside the domestic market, more contracts await.
Zacks Industry Rank Indicates Dull 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 #205, which places it in the bottom 19% 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 lackluster 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 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. Over the past year, the industry’s earnings estimate for 2020 has declined 64.6%.
Despite bleak near-term prospects of the industry, we will present a few stocks that investors can buy or retain, given their prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
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 38.8% in the past year compared with the broader sector’s decrease of 29.4%. The S&P 500, in contrast, has risen 4.9% in the same time frame.
One-Year Price Performance
Industry’s Current Valuation
Since oilfield equipment providers 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 1.86X, lower than the S&P 500’s 10.93X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.38X.
Over the past five years, the industry has traded as high as 27.40X, as low as 1.86X, with a median of 7.93X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The bleak business outlook in North America will keep haunting the oil and gas equipment industry. However, recovering offshore prospects may provide relief to the companies. Notably, oilfield equipment suppliers could invest in growth projects in offshore and global prospects, since they have flexible balance sheet.
Sector consolidation, adoption of superior technologies, new operational systems’ optimization of fleet through strategic sell-offs, and acquisition and profitable collaborations, among other strategic strides, will boost prospects of the mechanical and equipment industry.
We are presenting two stocks with Zacks Rank #2 (Buy) that are poised for growth. There are two other stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
Superior Energy Services, Inc. : Headquartered in Houston, TX, the company provides oilfield equipment and services to upstream energy firms in the domestic market, and abroad. The company helps its clients by providing downhole drilling tools. This Zacks Rank #2 company’s 2020 earnings estimates have witnessed two upward revisions and no downward movement over the past 30 days.
Price and Consensus: SPN
Natural Gas Services Group, Inc. (NGS - Free Report) : This Zacks Rank #2 company is a leading provider of compression equipment and flare ignition systems to natural gas producing companies. Its bottom line for fiscal 2020 is expected to rise 65% year over year.
Price and Consensus: NGS
Dril-Quip, Inc. (DRQ - Free Report) : This Delaware corporation manufactures highly engineered offshore drilling and production equipment for deep-water severe-service applications, and harsh environmental conditions. This Zacks Rank #3 company has an expected earnings growth rate of 250% for first-quarter 2020.
Price and Consensus: DRQ
National Oilwell Varco, Inc. (NOV - Free Report) : This Houston, TX-based company is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, and equipment used in oil and gas drilling and production worldwide. The Zacks Rank #3 company’s bottom line is expected to grow 197.2% in 2020.
Price and Consensus: NOV
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Will Global Prospects Rescue Oil & Gas Equipment Industry?
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 rig components — to exploration and production companies. These help the upstream players in the extraction of oil and natural gas from fields, both onshore and offshore.
Let’s take a look at the industry’s three major themes:
Oil prices continue to be in the bearish territory as demand for energy remains low owing to a slowdown in global economic growth. Moreover, the coronavirus outbreak has crippled China’s economy, the largest crude importer. Although the unfavorable business environment is expected to be short-lived, the situation has put a downward pressure on oil prices, thereby weakening OPEC’s efforts to improve the scenario. Thus, explorers and producers are not getting incentives to produce crude volumes on a massive scale. Hence, with lower growth in crude production, demand for oilfield equipment is likely to remain soft.
Drillers in North America have been spending conservatively since the beginning of last year. This is because investors are demanding explorers to return more capital instead of focusing solely on production growth. Eventually, drilling activities have slowed down as more and more rigs are being removed from oil and gas fields in the continent. In fact, rigs in the United States totaled 790 as of Feb 28, 2020, down by 248 year over year, per data provided by Baker Hughes Company (BKR - Free Report) . The slowdown in drilling operations has further clouded the outlook for oilfield equipment contracts.
Promising outlook for oilfield equipment suppliers in the international market and offshore prospects are likely to partially make up for weak North American operations. Not only drillers in international resources are employing more rigs but also there has been an increase in the number of final investment decision approvals for new E&P projects in markets outside North America. Notably, the number of rigs in the international market rose by 54 from January 2019 to 1,078 in the first month of 2020. Thus, for companies outside the domestic market, more contracts await.
Zacks Industry Rank Indicates Dull 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 #205, which places it in the bottom 19% 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 lackluster 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 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. Over the past year, the industry’s earnings estimate for 2020 has declined 64.6%.
Despite bleak near-term prospects of the industry, we will present a few stocks that investors can buy or retain, given their prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
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 38.8% in the past year compared with the broader sector’s decrease of 29.4%. The S&P 500, in contrast, has risen 4.9% in the same time frame.
One-Year Price Performance
Industry’s Current Valuation
Since oilfield equipment providers 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 1.86X, lower than the S&P 500’s 10.93X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.38X.
Over the past five years, the industry has traded as high as 27.40X, as low as 1.86X, with a median of 7.93X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The bleak business outlook in North America will keep haunting the oil and gas equipment industry. However, recovering offshore prospects may provide relief to the companies. Notably, oilfield equipment suppliers could invest in growth projects in offshore and global prospects, since they have flexible balance sheet.
Sector consolidation, adoption of superior technologies, new operational systems’ optimization of fleet through strategic sell-offs, and acquisition and profitable collaborations, among other strategic strides, will boost prospects of the mechanical and equipment industry.
We are presenting two stocks with Zacks Rank #2 (Buy) that are poised for growth. There are two other stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Superior Energy Services, Inc. : Headquartered in Houston, TX, the company provides oilfield equipment and services to upstream energy firms in the domestic market, and abroad. The company helps its clients by providing downhole drilling tools. This Zacks Rank #2 company’s 2020 earnings estimates have witnessed two upward revisions and no downward movement over the past 30 days.
Price and Consensus: SPN
Natural Gas Services Group, Inc. (NGS - Free Report) : This Zacks Rank #2 company is a leading provider of compression equipment and flare ignition systems to natural gas producing companies. Its bottom line for fiscal 2020 is expected to rise 65% year over year.
Price and Consensus: NGS
Dril-Quip, Inc. (DRQ - Free Report) : This Delaware corporation manufactures highly engineered offshore drilling and production equipment for deep-water severe-service applications, and harsh environmental conditions. This Zacks Rank #3 company has an expected earnings growth rate of 250% for first-quarter 2020.
Price and Consensus: DRQ
National Oilwell Varco, Inc. (NOV - Free Report) : This Houston, TX-based company is a world leader in the design, manufacture, and sale of comprehensive systems, components, products, and equipment used in oil and gas drilling and production worldwide. The Zacks Rank #3 company’s bottom line is expected to grow 197.2% in 2020.
Price and Consensus: NOV
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
See these 7 breakthrough stocks now>>