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3 Oilfield Services Stocks Set to Thrive Despite Industry Challenges
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Strict capital management by upstream energy firms is leading to decreased demand for oilfield services, creating a challenging outlook for the Zacks Oil and Gas- Field Services industry. Companies in this sector must navigate the evolving energy transition landscape effectively to succeed. Consequently, falling short of energy transition objectives could negatively impact their cash flow.
Among the companies in the industry that are likely to survive the business challenges are Baker Hughes Company (BKR - Free Report) , Archrock Inc (AROC - Free Report) and Smart Sand Inc. (SND - 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 like SLB and Halliburton Company 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. The reduction in drilling activity indicates lower demand for oilfield services, as companies like SLB and Halliburton, which primarily assist upstream operators in setting up oil and gas wells, are impacted by this shift.
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 affect cash flow.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 22-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #212, which places it in the bottom 15% 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 soared 11% over this period against the S&P 500’s rise of 28.5% and the broader sector’s 19.4% 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 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 EV/EBITDA, the industry is currently trading at 7.04X compared with the S&P 500’s 18.59X and sector’s 3.90X.
Over the past five years, the industry has traded as high as 12.73X and as low as 1.01X, with a median of 8.16X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oilfield Services Stocks Trying to Survive Industry Challenges
Archrock
Archrock's acquisition of Total Operations and Production Services (“TOPS”) brings a young, fully electric compression fleet, in turn significantly expanding ARCH’s capacity and improving margins. By retaining the TOPS management team, Archrock, currently carrying a Zacks Rank #3 (Hold), has gained valuable expertise in managing electric-driven compression fleets, positioning itself as a leader in the shift toward electrified natural gas compression.
Price and Consensus: AROC
Baker Hughes
Baker Hughes, with a Zacks Rank of 3, is poised for growth by leveraging its advanced LNG and energy technologies, as demonstrated by its pivotal role in the Louisiana LNG project and strategic expansion in Namibia. The company’s expertise in cutting-edge equipment and infrastructure positions it to capitalize on the rising global energy demand. Its focus on innovation and localization enhances operational efficiency while supporting sustainable energy solutions.
Price and Consensus: BKR
Smart Sand
Smart Sand, carrying a Zacks Rank #3, is a leading manufacturer of Northern White sand, known for its superior quality and cost-effectiveness, and has a solid business model. The Northern White sand serves as a premium proppant in hydraulic fracturing processes to improve the recovery rates of hydrocarbons in both oil and natural gas wells. You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.
Price and Consensus: SND
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3 Oilfield Services Stocks Set to Thrive Despite Industry Challenges
Strict capital management by upstream energy firms is leading to decreased demand for oilfield services, creating a challenging outlook for the Zacks Oil and Gas- Field Services industry. Companies in this sector must navigate the evolving energy transition landscape effectively to succeed. Consequently, falling short of energy transition objectives could negatively impact their cash flow.
Among the companies in the industry that are likely to survive the business challenges are Baker Hughes Company (BKR - Free Report) , Archrock Inc (AROC - Free Report) and Smart Sand Inc. (SND - 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 like SLB and Halliburton Company 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. The reduction in drilling activity indicates lower demand for oilfield services, as companies like SLB and Halliburton, which primarily assist upstream operators in setting up oil and gas wells, are impacted by this shift.
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 affect cash flow.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 22-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #212, which places it in the bottom 15% 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 soared 11% over this period against the S&P 500’s rise of 28.5% and the broader sector’s 19.4% 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 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 EV/EBITDA, the industry is currently trading at 7.04X compared with the S&P 500’s 18.59X and sector’s 3.90X.
Over the past five years, the industry has traded as high as 12.73X and as low as 1.01X, with a median of 8.16X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oilfield Services Stocks Trying to Survive Industry Challenges
Archrock
Archrock's acquisition of Total Operations and Production Services (“TOPS”) brings a young, fully electric compression fleet, in turn significantly expanding ARCH’s capacity and improving margins. By retaining the TOPS management team, Archrock, currently carrying a Zacks Rank #3 (Hold), has gained valuable expertise in managing electric-driven compression fleets, positioning itself as a leader in the shift toward electrified natural gas compression.
Price and Consensus: AROC
Baker Hughes
Baker Hughes, with a Zacks Rank of 3, is poised for growth by leveraging its advanced LNG and energy technologies, as demonstrated by its pivotal role in the Louisiana LNG project and strategic expansion in Namibia. The company’s expertise in cutting-edge equipment and infrastructure positions it to capitalize on the rising global energy demand. Its focus on innovation and localization enhances operational efficiency while supporting sustainable energy solutions.
Price and Consensus: BKR
Smart Sand
Smart Sand, carrying a Zacks Rank #3, is a leading manufacturer of Northern White sand, known for its superior quality and cost-effectiveness, and has a solid business model. The Northern White sand serves as a premium proppant in hydraulic fracturing processes to improve the recovery rates of hydrocarbons in both oil and natural gas wells. You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.
Price and Consensus: SND