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4 Oilfield Services Stocks Set to Escape Industry Weakness
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Strict capital discipline among upstream energy companies is reducing the demand for oilfield services, resulting in a pessimistic forecast for the Zacks Oil and Gas- Field Services industry. The success of firms in this industry heavily relies on their ability to adeptly manage the shifting landscape of energy transition. As a result, not achieving energy transition goals will adversely impact their cash flow.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Baker Hughes Company (BKR - Free Report) , Helix Energy Solutions Group Inc. (HLX - Free Report) and Solaris Oilfield Infrastructure Inc (SOI - Free Report) .
About the Industry
The Zacks Oil and Gas - Field Services industry comprises companies that primarily engage in providing support services to exploration and production players. These companies help in manufacturing, repairing and maintaining wells, drilling equipment, leasing of drilling rigs, seismic testing and transport and directional solutions, among others. Also, the firms help upstream energy players locate oil and natural gas and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream firms. Furthermore, with countries worldwide investing heavily in liquefied natural gas (LNG) terminals, a few oilfield service companies are extending their reach beyond the hydrocarbon fields and capitalizing on contracts for manufacturing equipment used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Highly Volatile Business: The demand for oilfield services is predominantly tied to exploration and production activities. Given the reliance of oil explorers and producers on the volatile commodity pricing landscape, the business of oilfield service companies is susceptible to uncertainty.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Impacts of Failing Energy Transition Goals on Cashflows: The prosperity of companies within the industry hinges greatly on their adeptness in navigating the evolving energy transition landscape. This encompasses the ability of oilfield service providers to efficiently tackle the decarbonization of oil and gas operations while expanding the adoption of inventive, low-carbon and carbon-neutral technologies. Consequently, falling short of energy transition objectives will have repercussions on their cash flow.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 24-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #218, which places it in the bottom 13% 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 gloomy 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 consider, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.
The industry has declined 3.4% over this period compared with the S&P 500’s rise of 23.4% and the broader sector’s 7.9% growth.
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 7.56X compared with the S&P 500’s 19.43X and sector’s 3.15X.
Over the past five years, the industry has traded as high as 12.68X and as low as 1.01X, with a median of 8.12X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Trying to Survive Industry Challenges
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. Margin expansions across all its business segments, combined with international revenue growth, are bolstering its overall business performance. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 17.1% this year.
Price and Consensus: SLB
Baker Hughes: Through its Oilfield Services & Equipment business segment, Baker Hughes has been getting multiple significant contracts for integrated and mature assets solutions, thereby strengthening its relationship with Petrobras (PBR). BKR, carrying a Zacks Rank #2 (Buy), has also been returning meaningful cashflows to shareholders.
Price and Consensus: BKR
Solaris Oilfield: More patented equipment and systems of Solaris Oilfield Infrastructure will likely be deployed to the prolific oil and gas basins in the United States. This is because favorable commodity prices are expected to improve upstream activities, increasing demand for those equipment and systems. Currently, Solaris sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SOI
Helix Energy Solutions: Amid favorable crude prices, activities across the world in the oil and gas market are likely to continue increasing. This, in turn, can raise demand for offshore energy services. Being a leading international offshore energy services company, Zacks #3 Ranked Helix Energy Solutions is well poised to gain.
Price and Consensus: HLX
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4 Oilfield Services Stocks Set to Escape Industry Weakness
Strict capital discipline among upstream energy companies is reducing the demand for oilfield services, resulting in a pessimistic forecast for the Zacks Oil and Gas- Field Services industry. The success of firms in this industry heavily relies on their ability to adeptly manage the shifting landscape of energy transition. As a result, not achieving energy transition goals will adversely impact their cash flow.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Baker Hughes Company (BKR - Free Report) , Helix Energy Solutions Group Inc. (HLX - Free Report) and Solaris Oilfield Infrastructure Inc (SOI - Free Report) .
About the Industry
The Zacks Oil and Gas - Field Services industry comprises companies that primarily engage in providing support services to exploration and production players. These companies help in manufacturing, repairing and maintaining wells, drilling equipment, leasing of drilling rigs, seismic testing and transport and directional solutions, among others. Also, the firms help upstream energy players locate oil and natural gas and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream firms. Furthermore, with countries worldwide investing heavily in liquefied natural gas (LNG) terminals, a few oilfield service companies are extending their reach beyond the hydrocarbon fields and capitalizing on contracts for manufacturing equipment used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry's Future
Highly Volatile Business: The demand for oilfield services is predominantly tied to exploration and production activities. Given the reliance of oil explorers and producers on the volatile commodity pricing landscape, the business of oilfield service companies is susceptible to uncertainty.
Lower Upstream Spending: Although the commodity pricing scenario is favorable for exploration and production operations, there has been a slowdown in drilling activities, which may continue as upstream players are prioritizing stockholder returns rather than boosting output. Drilling activity slowdown signifies lower demand for oilfield services as oilfield service players mainly assist upstream companies in setting up oil and gas wells.
Impacts of Failing Energy Transition Goals on Cashflows: The prosperity of companies within the industry hinges greatly on their adeptness in navigating the evolving energy transition landscape. This encompasses the ability of oilfield service providers to efficiently tackle the decarbonization of oil and gas operations while expanding the adoption of inventive, low-carbon and carbon-neutral technologies. Consequently, falling short of energy transition objectives will have repercussions on their cash flow.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 24-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #218, which places it in the bottom 13% 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 gloomy 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 consider, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.
The industry has declined 3.4% over this period compared with the S&P 500’s rise of 23.4% and the broader sector’s 7.9% growth.
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 7.56X compared with the S&P 500’s 19.43X and sector’s 3.15X.
Over the past five years, the industry has traded as high as 12.68X and as low as 1.01X, with a median of 8.12X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Trying to Survive Industry Challenges
SLB: SLB is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. Margin expansions across all its business segments, combined with international revenue growth, are bolstering its overall business performance. SLB, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 17.1% this year.
Price and Consensus: SLB
Baker Hughes: Through its Oilfield Services & Equipment business segment, Baker Hughes has been getting multiple significant contracts for integrated and mature assets solutions, thereby strengthening its relationship with Petrobras (PBR). BKR, carrying a Zacks Rank #2 (Buy), has also been returning meaningful cashflows to shareholders.
Price and Consensus: BKR
Solaris Oilfield: More patented equipment and systems of Solaris Oilfield Infrastructure will likely be deployed to the prolific oil and gas basins in the United States. This is because favorable commodity prices are expected to improve upstream activities, increasing demand for those equipment and systems. Currently, Solaris sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SOI
Helix Energy Solutions: Amid favorable crude prices, activities across the world in the oil and gas market are likely to continue increasing. This, in turn, can raise demand for offshore energy services. Being a leading international offshore energy services company, Zacks #3 Ranked Helix Energy Solutions is well poised to gain.
Price and Consensus: HLX