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3 Oil & Gas Drilling Companies With Optimistic Prospects
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The Zacks Oil and Gas - Drilling industry is facing several headwinds. First, the U.S. rig count has been gradually declining and has fallen around 15% from a year ago, dampening drilling activity and affecting service companies' operations. Second, the industry is grappling with overcapacity and pricing pressures. Third, the recent Saudi announcement to maintain its Maximum Sustainable Capacity and cancel the planned expansion has negatively impacted investor sentiment, leading to a sell-off in oilfield services stocks. Despite these challenges, investors could still focus on companies like Saipem SpA (SAPMF - Free Report) , Seadrill Limited ((SDRL - Free Report) ), and Nabors Industries ((NBR - Free Report) ), which are well-positioned due to their strong fundamentals and efficiency initiatives, potentially capitalizing on the expanding international market.
Industry Overview
The Zacks Oil and Gas - Drilling industry consists of companies that provide rigs (or specialized vehicles) on a contractual basis to explore and develop oil and gas. These operators offer drilling rigs (both land-based/onshore and offshore), equipment, services and manpower to exploration and production companies worldwide. Drilling for hydrocarbons is quite expensive and technically difficult, and its future primarily depends on contracting activity and the total number of available rigs at a given time rather than the price of oil or gas. Within the industry, it's interesting to note that the volatility associated with offshore drilling companies is much higher than their onshore counterparts, and their share prices are more correlated to the price of crude oil. Overall, drilling stocks are among the most volatile and unpredictable in the entire equity market.
4 Trends Defining the Oil and Gas - Drilling Industry's Future
Declining Rig Count: After bouncing strongly from the depths of the pandemic, the oil and natural gas rig count in the United States has been gradually declining over the past year or so. Consequently, drilling activity — an important factor for services companies — has hit a speed bump. In the United States, a region on which these operators are highly dependent, the rig count has gone down around 15% from a year ago. The steady decline in rig count is worrying for contracting activity.
Overcapacity and Pricing Pressures: Overcapacity and pricing pressures are significant concerns for oil and gas drillers. Despite their efforts to prioritize pricing over utilization, overcapacity in the industry limits the potential benefits. Pricing pressures can erode profit margins, making it challenging for the industry participants to maintain profitability in a competitive market. This issue is compounded by the reduced drilling activity, further impacting the company’s financial performance.
Robust International Demand: The oil and gas drilling companies are experiencing a surge in international activity, marking the strongest demand environment in over a decade. This robust demand is supported by tendering and rig award negotiations, indicating a strong and sustained need for drilling services on a global scale. This expansion in international operations is a key driver of future revenue growth and stability for the sector operators.
Impact of the Saudi Announcement: The recent announcement by Saudi Arabia to maintain its Maximum Sustainable Capacity at 12 million barrels per day (bbl/day) and cancel the planned expansion to 13 million bbl/day by 2027 has negatively impacted the oil drilling industry. This decision has caused a sell-off in oilfield services stocks, as investors perceived it as an end to the capex boom in the Middle East. The immediate market reaction indicates investor concerns about future revenue streams from Saudi projects.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas - Drilling industry is a 12-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #205, which places it in the bottom 18% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2024 have gone down 31.5% in the past year.
Despite the dim near-term prospects 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 shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Oil and Gas - Drilling industry has fared worse than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gone down 10.6% over this period compared with the broader sector’s increase of 15.4%. Meanwhile, the S&P 500 has gained 25.8%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas drilling 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 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 19.26X, slightly lower than the S&P 500’s 20X. It is also well above the sector’s trailing 12-month EV/EBITDA of 3.22X.
Over the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 14.09X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Drilling Stocks to Watch
Saipem: A global leader in the engineering and construction of major projects encompassing the energy space, Saipem is active both offshore and onshore through its sophisticated fleet of vessels. The company's focus on project delivery, execution and cash flow generation drives its robust margins. Further, Saipem’s strong backlog indicates increased revenue visibility in the future.
The Zacks Consensus Estimate for 2024 earnings of SAPMF indicates 110% growth. Over the past 60 days, this Italy-based firm saw the Zacks Consensus Estimate for 2024 move up 16.7%. The company has a market capitalization of $5.1 billion. Saipem stock, carrying a Zacks Rank #2 (Buy), has surged 51.2% in a year.
Seadrill Limited: This #3 Ranked company is a market-leading international driller with strong exposure in key strategic basins like the U.S. Gulf of Mexico, Brazil and Angola. Following the Aquadrill LLC acquisition last year, SDRL has improved its cash flow generation potential significantly. A robust balance sheet, enhanced liquidity and credit profile are the other positives in the Seadill story. The company has transformed its capital structure through accretive transactions and continues to deliver operational excellence.
The Zacks Rank #3 (Hold) firm has a market capitalization of $4 billion. Seadrill, having beaten the Zacks Consensus Estimate for earnings in each of the last four quarters, has a trailing four-quarter earnings surprise of roughly 64.2%, on average. The SDRL stock has increased 20% in a year.
Price and Consensus: SDRL
Nabors Industries: It is one of the leading North American land drilling contractors, having a large, high-quality fleet of drilling rigs. The company is well positioned with a sound mix of high-performance rigs and new rigs working in the key shale plays like Bakken and Permian. Nabors’ initiatives to expand its geographic reach and diversify its operating assets beyond land rigs bode well for its Rig Technologies and Drilling Solutions segments. The Tesco Corporation, Robotic Drilling Systems and PetroMar buyouts have boosted the drilling operations and technology of Nabors, adding to the company's earnings and shareholder value.
The Zacks Consensus Estimate for 2024 earnings of NBR indicates 58.5% growth. Over the past 60 days, this Hamilton-based firm saw the Zacks Consensus Estimate for 2024 move up 2.3%. The #3 Ranked company has a market capitalization of $840.9 million. Nabors Industries stock has lost 23.9% in a year.
Price and Consensus: NBR
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3 Oil & Gas Drilling Companies With Optimistic Prospects
The Zacks Oil and Gas - Drilling industry is facing several headwinds. First, the U.S. rig count has been gradually declining and has fallen around 15% from a year ago, dampening drilling activity and affecting service companies' operations. Second, the industry is grappling with overcapacity and pricing pressures. Third, the recent Saudi announcement to maintain its Maximum Sustainable Capacity and cancel the planned expansion has negatively impacted investor sentiment, leading to a sell-off in oilfield services stocks. Despite these challenges, investors could still focus on companies like Saipem SpA (SAPMF - Free Report) , Seadrill Limited ((SDRL - Free Report) ), and Nabors Industries ((NBR - Free Report) ), which are well-positioned due to their strong fundamentals and efficiency initiatives, potentially capitalizing on the expanding international market.
Industry Overview
The Zacks Oil and Gas - Drilling industry consists of companies that provide rigs (or specialized vehicles) on a contractual basis to explore and develop oil and gas. These operators offer drilling rigs (both land-based/onshore and offshore), equipment, services and manpower to exploration and production companies worldwide. Drilling for hydrocarbons is quite expensive and technically difficult, and its future primarily depends on contracting activity and the total number of available rigs at a given time rather than the price of oil or gas. Within the industry, it's interesting to note that the volatility associated with offshore drilling companies is much higher than their onshore counterparts, and their share prices are more correlated to the price of crude oil. Overall, drilling stocks are among the most volatile and unpredictable in the entire equity market.
4 Trends Defining the Oil and Gas - Drilling Industry's Future
Declining Rig Count: After bouncing strongly from the depths of the pandemic, the oil and natural gas rig count in the United States has been gradually declining over the past year or so. Consequently, drilling activity — an important factor for services companies — has hit a speed bump. In the United States, a region on which these operators are highly dependent, the rig count has gone down around 15% from a year ago. The steady decline in rig count is worrying for contracting activity.
Overcapacity and Pricing Pressures: Overcapacity and pricing pressures are significant concerns for oil and gas drillers. Despite their efforts to prioritize pricing over utilization, overcapacity in the industry limits the potential benefits. Pricing pressures can erode profit margins, making it challenging for the industry participants to maintain profitability in a competitive market. This issue is compounded by the reduced drilling activity, further impacting the company’s financial performance.
Robust International Demand: The oil and gas drilling companies are experiencing a surge in international activity, marking the strongest demand environment in over a decade. This robust demand is supported by tendering and rig award negotiations, indicating a strong and sustained need for drilling services on a global scale. This expansion in international operations is a key driver of future revenue growth and stability for the sector operators.
Impact of the Saudi Announcement: The recent announcement by Saudi Arabia to maintain its Maximum Sustainable Capacity at 12 million barrels per day (bbl/day) and cancel the planned expansion to 13 million bbl/day by 2027 has negatively impacted the oil drilling industry. This decision has caused a sell-off in oilfield services stocks, as investors perceived it as an end to the capex boom in the Middle East. The immediate market reaction indicates investor concerns about future revenue streams from Saudi projects.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas - Drilling industry is a 12-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #205, which places it in the bottom 18% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2024 have gone down 31.5% in the past year.
Despite the dim near-term prospects 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 shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Oil and Gas - Drilling industry has fared worse than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gone down 10.6% over this period compared with the broader sector’s increase of 15.4%. Meanwhile, the S&P 500 has gained 25.8%.
One-Year Price Performance
Industry's Current Valuation
Since oil and gas drilling 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 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 19.26X, slightly lower than the S&P 500’s 20X. It is also well above the sector’s trailing 12-month EV/EBITDA of 3.22X.
Over the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 14.09X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Drilling Stocks to Watch
Saipem: A global leader in the engineering and construction of major projects encompassing the energy space, Saipem is active both offshore and onshore through its sophisticated fleet of vessels. The company's focus on project delivery, execution and cash flow generation drives its robust margins. Further, Saipem’s strong backlog indicates increased revenue visibility in the future.
The Zacks Consensus Estimate for 2024 earnings of SAPMF indicates 110% growth. Over the past 60 days, this Italy-based firm saw the Zacks Consensus Estimate for 2024 move up 16.7%. The company has a market capitalization of $5.1 billion. Saipem stock, carrying a Zacks Rank #2 (Buy), has surged 51.2% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SAPMF
Seadrill Limited: This #3 Ranked company is a market-leading international driller with strong exposure in key strategic basins like the U.S. Gulf of Mexico, Brazil and Angola. Following the Aquadrill LLC acquisition last year, SDRL has improved its cash flow generation potential significantly. A robust balance sheet, enhanced liquidity and credit profile are the other positives in the Seadill story. The company has transformed its capital structure through accretive transactions and continues to deliver operational excellence.
The Zacks Rank #3 (Hold) firm has a market capitalization of $4 billion. Seadrill, having beaten the Zacks Consensus Estimate for earnings in each of the last four quarters, has a trailing four-quarter earnings surprise of roughly 64.2%, on average. The SDRL stock has increased 20% in a year.
Price and Consensus: SDRL
Nabors Industries: It is one of the leading North American land drilling contractors, having a large, high-quality fleet of drilling rigs. The company is well positioned with a sound mix of high-performance rigs and new rigs working in the key shale plays like Bakken and Permian. Nabors’ initiatives to expand its geographic reach and diversify its operating assets beyond land rigs bode well for its Rig Technologies and Drilling Solutions segments. The Tesco Corporation, Robotic Drilling Systems and PetroMar buyouts have boosted the drilling operations and technology of Nabors, adding to the company's earnings and shareholder value.
The Zacks Consensus Estimate for 2024 earnings of NBR indicates 58.5% growth. Over the past 60 days, this Hamilton-based firm saw the Zacks Consensus Estimate for 2024 move up 2.3%. The #3 Ranked company has a market capitalization of $840.9 million. Nabors Industries stock has lost 23.9% in a year.
Price and Consensus: NBR