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4 Oil & Gas Equipment Stocks to Watch Amid Industry Challenges
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Although oil price is favorable, it is still significantly lower than the 2022 level. This is likely to reduce the demand for drilling & production equipment, thereby making the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry gloomy.
Considerable debt exposures are also a matter of concern, making it difficult for companies to build a solid foundation to sail through various business uncertainties. Some of the stocks that are trying to survive the industry challenges are Kodiak Gas Services, Inc. (KGS - Free Report) , Oil States International, Inc. (OIS - Free Report) , Matrix Service Company (MTRX - Free Report) and Profire Energy, Inc. (PFIE - Free Report) .
About the Industry
The Zacks Oil and Gas - Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment — production machinery, pumps, valves and several other drilling appliances like rig components — to exploration and production companies. These help upstream energy players extract crude oil and natural gas from fields, both onshore and offshore. Hence, the well-being of oilfield equipment businesses is positively correlated to expenditures by upstream companies. These companies receive deals from integrated energy firms and independent as well as national oil and gas companies. Oilfield equipment providers also design, manufacture, engineer and install products used to treat and process crude oil, natural gas and others. Their products comprise gadgets and instruments for gas compression packages and water treatment works.
What's Shaping the Future of the Oil & Gas Equipment Industry?
Drilling & Production Equipment Demand to Decline: Despite the favorable crude prices, the possibility of the commodity price hitting $100 per barrel, like in 2022, is almost negligible. Also, the U.S. Energy Information Administration (“EIA”) is expecting a slowdown in GDP growth in 2024 compared to last year. This economic slowdown is likely to result in reduced exploration and production activities, consequently leading to diminished demand for drilling and production equipment of the companies belonging to the industry.
Lower Production Growth Rate: Exploration and production companies are being asked by investors to focus more on shareholders’ returns rather than solely allocating capital for the production of oil and gas. This is reducing the growth rate of production, thus hurting drilling & production equipment demand.
Higher Debt Load: The composite stocks belonging to the industry have significantly higher exposure to debt capital compared to the broader energy sector. Thus, the companies belonging to the industry are more vulnerable to the energy market uncertainties.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #151, which places it in the bottom 40% 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 dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
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 Outperforms Sector & S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has rallied 34.5% in the past year compared with the broader sector’s improvement of 11.3% and the S&P 500’s 29.6% increase.
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 10.08X, lower than the S&P 500’s 15.17X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 4.26X.
Over the past five years, the industry has traded as high as 12.8X and as low as 2.4X, with a median of 10.01X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
4 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges
Oil States International, Inc: Oil States International focuses on capital and cost discipline. Owing to this discipline, amid improving industry fundamentals, the firm is witnessing increasing revenues and EBITDA.
The company, carrying a Zacks Rank of 3 (Hold), has a strong balance sheet since it has significantly lower exposure to debt capital than composite stocks belonging to the industry.
Price and Consensus: OIS
Matrix Service: It is well-known for providing engineering and construction services to the energy and industrial markets. Matrix, carrying a Zacks Rank of 3, has been witnessing a sustained momentum in project awards, which is helping it to secure incremental cashflows. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: MTRX
Profire Energy: It is a leading provider of powerful and safe burner and combustion management solutions. #3 Ranked PFIE’s business is mainly focused on the energy sector’s upstream, midstream and downstream areas. Profire Energy is highly focused on expanding its product solutions in oil and gas operations that have new opportunities.
Price and Consensus: PFIE
Kodiak Gas Services: Being a well-known natural gas contract compression service provider, Kodiak Gas Services is strongly footed to gain on increasing clean energy demand. The stock, sporting a Zacks Rank 1, has witnessed upward earnings estimate revisions for 2024 over the past 30 days.
Price and Consensus: KGS
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4 Oil & Gas Equipment Stocks to Watch Amid Industry Challenges
Although oil price is favorable, it is still significantly lower than the 2022 level. This is likely to reduce the demand for drilling & production equipment, thereby making the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry gloomy.
Considerable debt exposures are also a matter of concern, making it difficult for companies to build a solid foundation to sail through various business uncertainties. Some of the stocks that are trying to survive the industry challenges are Kodiak Gas Services, Inc. (KGS - Free Report) , Oil States International, Inc. (OIS - Free Report) , Matrix Service Company (MTRX - Free Report) and Profire Energy, Inc. (PFIE - Free Report) .
About the Industry
The Zacks Oil and Gas - Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment — production machinery, pumps, valves and several other drilling appliances like rig components — to exploration and production companies. These help upstream energy players extract crude oil and natural gas from fields, both onshore and offshore. Hence, the well-being of oilfield equipment businesses is positively correlated to expenditures by upstream companies. These companies receive deals from integrated energy firms and independent as well as national oil and gas companies. Oilfield equipment providers also design, manufacture, engineer and install products used to treat and process crude oil, natural gas and others. Their products comprise gadgets and instruments for gas compression packages and water treatment works.
What's Shaping the Future of the Oil & Gas Equipment Industry?
Drilling & Production Equipment Demand to Decline: Despite the favorable crude prices, the possibility of the commodity price hitting $100 per barrel, like in 2022, is almost negligible. Also, the U.S. Energy Information Administration (“EIA”) is expecting a slowdown in GDP growth in 2024 compared to last year. This economic slowdown is likely to result in reduced exploration and production activities, consequently leading to diminished demand for drilling and production equipment of the companies belonging to the industry.
Lower Production Growth Rate: Exploration and production companies are being asked by investors to focus more on shareholders’ returns rather than solely allocating capital for the production of oil and gas. This is reducing the growth rate of production, thus hurting drilling & production equipment demand.
Higher Debt Load: The composite stocks belonging to the industry have significantly higher exposure to debt capital compared to the broader energy sector. Thus, the companies belonging to the industry are more vulnerable to the energy market uncertainties.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #151, which places it in the bottom 40% 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 dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
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 Outperforms Sector & S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has rallied 34.5% in the past year compared with the broader sector’s improvement of 11.3% and the S&P 500’s 29.6% increase.
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 10.08X, lower than the S&P 500’s 15.17X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 4.26X.
Over the past five years, the industry has traded as high as 12.8X and as low as 2.4X, with a median of 10.01X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
4 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges
Oil States International, Inc: Oil States International focuses on capital and cost discipline. Owing to this discipline, amid improving industry fundamentals, the firm is witnessing increasing revenues and EBITDA.
The company, carrying a Zacks Rank of 3 (Hold), has a strong balance sheet since it has significantly lower exposure to debt capital than composite stocks belonging to the industry.
Price and Consensus: OIS
Matrix Service: It is well-known for providing engineering and construction services to the energy and industrial markets. Matrix, carrying a Zacks Rank of 3, has been witnessing a sustained momentum in project awards, which is helping it to secure incremental cashflows. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: MTRX
Profire Energy: It is a leading provider of powerful and safe burner and combustion management solutions. #3 Ranked PFIE’s business is mainly focused on the energy sector’s upstream, midstream and downstream areas. Profire Energy is highly focused on expanding its product solutions in oil and gas operations that have new opportunities.
Price and Consensus: PFIE
Kodiak Gas Services: Being a well-known natural gas contract compression service provider, Kodiak Gas Services is strongly footed to gain on increasing clean energy demand. The stock, sporting a Zacks Rank 1, has witnessed upward earnings estimate revisions for 2024 over the past 30 days.
Price and Consensus: KGS