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Oil & Gas Equipment Industry to Overcome Coronavirus Blues
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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 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:
Crude prices are recovering from historic lows with the reopening of economy, courtesy of the easing of lockdown measures imposed to curb the coronavirus pandemic. Notably, energy demand in China — the world’s second-largest energy consumer — has been gradually increasing. Moreover, OPEC+ production cuts with greater compliance by the laggard members are expected to keep boosting oil prices. While overall demand growth still remains well below pre-virus levels, the recovery will keep pushing crude prices higher. As West Texas Intermediate crude has recovered 69.8% in the past two months, explorers and producers are expected to get incentives to produce more crude volumes. Hence, with growth in crude production, demand for oilfield equipment is likely to soar.
The supply side is looking bright at the moment. The oil price improvement has triggered a resumption of upstream activities in the shale plays. Companies like Parsley Energy and EOG Resources, Inc. (EOG - Free Report) have partially resumed curtailed production at their shale assets. Also, upstream major ConocoPhillips (COP - Free Report) is planning to start restoring output in Alaska and the Lower 48 area this month. In Canada, rig count increased from 13 on Jun 26 to 18 on Jul 2, per data provided by Baker Hughes Company (BKR - Free Report) . Moreover, most analysts expect the decline in the tally of weekly rig to narrow down further in the United States. In fact, the analysts also believe that if the crude recovery sustains, many explorers will consider adding rigs. This is expected to boost oilfield equipment contracts.
The coronavirus pandemic has hit the global economy hard, in turn bringing down energy growth. The situation has resulted in lower expenditures from upstream companies. To navigate through the market volatility, oilfield equipment providers have adopted measures to strengthen balance sheet and reduce capital expenditure. This is likely to help the companies survive the current market uncertainty, which is a major positive. Oilfield equipment providers will depend on capital efficiency enhancement to increase value generation from their operations, which will enable them to thrive in the long term.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #96, which places it in the top 38% 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 bright 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.
Taking into consideration the increasingly bullish outlook of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s recent stock-market performance and valuation picture 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 Zacks S&P 500 composite over the past year.
The industry has declined 11.2% in the past year compared with the broader sector’s decrease of 9%. The S&P 500, in contrast, has risen 6.2% 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 2.08X, lower than the S&P 500’s 11.55X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.87X.
Over the past five years, the industry has traded as high as 21.79X, as low as 1.97X, with a median of 5.29X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
As global economies lift travel bans and lockdowns, demand for energy will witness significant recovery and crude prices will keep rising. The improving North American energy space, especially in the shale plays wherein production is restoring, will enhance oilfield equipment demand.
Moreover, sector consolidation, adoption of superior technologies, new operational systems’ optimization of fleet through strategic sell-offs, and acquisitions and profitable collaborations, among other strategic strides, will boost prospects of the mechanical and equipment industry.
We are presenting one stock with a Zacks #1 Rank (Strong Buy) and another with a Zacks Rank #2 (Buy) that are poised for growth. There are two other stocks currently carrying a Zacks Rank #3 (Hold) that investors may retain in their portfolio at the moment.
ION Geophysical Corporation : Headquartered in Houston, TX, ION Geophysical is a leading provider of geophysical technology, services, and solutions for the oil and gas industry all around the globe. The company helps its clients by reducing risks associated with exploration and reservoir development. This Zacks Rank #1 company’s 2020 bottom line is expected to rise 46.3% year over year.
Price and Consensus: IO
USA Compression Partners, LP (USAC - Free Report) : This Zacks Rank #2 company is one of the largest independent natural gas compression services providers across the United States in terms of fleet horsepower. The firm is also involved in engineering, design, operation, service and repair of compressor units. For 2020 and 2021, the partnership’s bottom-line estimates have been stable over the past 30 days.
Price and Consensus: USAC
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. This Zacks Rank #3 company’s bottom line is expected to grow 52.8% in 2020.
Price and Consensus: NOV
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 42.9% for third-quarter 2020.
Price and Consensus: DRQ
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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Oil & Gas Equipment Industry to Overcome Coronavirus Blues
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 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:
Zacks Industry Rank Indicates Solid Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #96, which places it in the top 38% 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 bright 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.
Taking into consideration the increasingly bullish outlook of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s recent stock-market performance and valuation picture 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 Zacks S&P 500 composite over the past year.
The industry has declined 11.2% in the past year compared with the broader sector’s decrease of 9%. The S&P 500, in contrast, has risen 6.2% 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 2.08X, lower than the S&P 500’s 11.55X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.87X.
Over the past five years, the industry has traded as high as 21.79X, as low as 1.97X, with a median of 5.29X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
As global economies lift travel bans and lockdowns, demand for energy will witness significant recovery and crude prices will keep rising. The improving North American energy space, especially in the shale plays wherein production is restoring, will enhance oilfield equipment demand.
Moreover, sector consolidation, adoption of superior technologies, new operational systems’ optimization of fleet through strategic sell-offs, and acquisitions and profitable collaborations, among other strategic strides, will boost prospects of the mechanical and equipment industry.
We are presenting one stock with a Zacks #1 Rank (Strong Buy) and another with a Zacks Rank #2 (Buy) that are poised for growth. There are two other stocks currently carrying a Zacks Rank #3 (Hold) that investors may retain in their portfolio at the moment.
You can see the complete list of today’s Zacks #1 Rank stocks here.
ION Geophysical Corporation : Headquartered in Houston, TX, ION Geophysical is a leading provider of geophysical technology, services, and solutions for the oil and gas industry all around the globe. The company helps its clients by reducing risks associated with exploration and reservoir development. This Zacks Rank #1 company’s 2020 bottom line is expected to rise 46.3% year over year.
Price and Consensus: IO
USA Compression Partners, LP (USAC - Free Report) : This Zacks Rank #2 company is one of the largest independent natural gas compression services providers across the United States in terms of fleet horsepower. The firm is also involved in engineering, design, operation, service and repair of compressor units. For 2020 and 2021, the partnership’s bottom-line estimates have been stable over the past 30 days.
Price and Consensus: USAC
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. This Zacks Rank #3 company’s bottom line is expected to grow 52.8% in 2020.
Price and Consensus: NOV
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 42.9% for third-quarter 2020.
Price and Consensus: DRQ
The Hottest Tech Mega-Trend of All
Last year, it generated $24 billion in global revenues. By 2020, it's predicted to blast through the roof to $77.6 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>