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4 Energy Stocks to Gain Despite Oilfield Service Industry Woes
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A volatile pricing environment for commodities, driven by rising trade tensions and strict capital management by upstream energy firms, is diminishing the demand for oilfield services, creating a challenging outlook for the Zacks Oil and Gas- Field Services industry. Companies in this sector must adeptly navigate the evolving landscape of energy transition to succeed. Failing to meet energy transition objectives could adversely impact their cash flow.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Baker Hughes Company (BKR - Free Report) and Archrock Inc (AROC - 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
Exposure to Volatile Oil & Gas Prices: The demand for oilfield services is predominantly tied to exploration and production activities as the companies assist the upstream players in effectively setting up oil and gas wells. Given the reliance of oil explorers and producers on a volatile and uncertain commodity pricing landscape, which is currently being affected by the escalating US-China trade war, the business of oilfield service companies like SLB and Halliburton is susceptible to uncertainty.
Lower Upstream Spending: Although the commodity pricing scenario is still favorable for exploration and production operations since the breakeven prices are much lower for existing wells in the shale plays, 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 adversely 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 #149, 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 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 plummeted 27.1% over this period against the S&P 500’s rise of 4.7% and the broader sector’s 15.2% decline.
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.
Based on the trailing 12-month EV/EBITDA, the industry is currently trading at 5.45X compared with the S&P 500’s 15.53X and the sector’s 4.14X.
Over the past five years, the industry has traded as high as 12.87X and as low as 1.10X, with a median of 8.24X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 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 sporting a Zacks Rank #1 (Strong Buy), 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
With its business footprint spreading across natural gas, LNG (liquefied natural gas), clean energy and mature oilfields, Baker Hughes' long-term prospects look bright. The diverse business portfolio secures BKR with steady earnings even if the operations remain volatile. Importantly, Baker Hughes is strengthening its global presence to secure additional cash flows while expanding to prospective regions like Namibia, Oman and Abu Dhabi. Currently, BKR carries a Zacks Rank #3 (Hold).
Price and Consensus: BKR
SLB
SLB’s diversified business portfolio, leadership in digital technology, and strategic expansions into low-carbon and data center markets position it to sustain its growth and margins, even though upstream investments are moderating. Zacks #3 Ranked SLB also has a strong focus on shareholder returns and running its business efficiently. You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.
Price and Consensus: SLB
Halliburton
Halliburton, with a Zacks Rank of 3, is a leading oilfield service player with strong cash flow and smart investments in growth areas. While the industry faces ups and downs, its innovations and global reach should keep it ahead of competitors. Notably, HAL has identified four key growth areas comprising drilling technologies, unconventionals, well intervention and artificial lift with the potential to contribute $2.5 to $3 billion in annual revenues within the next three to five years.
Price and Consensus: HAL
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4 Energy Stocks to Gain Despite Oilfield Service Industry Woes
A volatile pricing environment for commodities, driven by rising trade tensions and strict capital management by upstream energy firms, is diminishing the demand for oilfield services, creating a challenging outlook for the Zacks Oil and Gas- Field Services industry. Companies in this sector must adeptly navigate the evolving landscape of energy transition to succeed. Failing to meet energy transition objectives could adversely impact their cash flow.
Among the companies in the industry that are likely to survive the business challenges are SLB (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Baker Hughes Company (BKR - Free Report) and Archrock Inc (AROC - 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
Exposure to Volatile Oil & Gas Prices: The demand for oilfield services is predominantly tied to exploration and production activities as the companies assist the upstream players in effectively setting up oil and gas wells. Given the reliance of oil explorers and producers on a volatile and uncertain commodity pricing landscape, which is currently being affected by the escalating US-China trade war, the business of oilfield service companies like SLB and Halliburton is susceptible to uncertainty.
Lower Upstream Spending: Although the commodity pricing scenario is still favorable for exploration and production operations since the breakeven prices are much lower for existing wells in the shale plays, 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 adversely 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 #149, 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 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 plummeted 27.1% over this period against the S&P 500’s rise of 4.7% and the broader sector’s 15.2% decline.
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.
Based on the trailing 12-month EV/EBITDA, the industry is currently trading at 5.45X compared with the S&P 500’s 15.53X and the sector’s 4.14X.
Over the past five years, the industry has traded as high as 12.87X and as low as 1.10X, with a median of 8.24X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 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 sporting a Zacks Rank #1 (Strong Buy), 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
With its business footprint spreading across natural gas, LNG (liquefied natural gas), clean energy and mature oilfields, Baker Hughes' long-term prospects look bright. The diverse business portfolio secures BKR with steady earnings even if the operations remain volatile. Importantly, Baker Hughes is strengthening its global presence to secure additional cash flows while expanding to prospective regions like Namibia, Oman and Abu Dhabi. Currently, BKR carries a Zacks Rank #3 (Hold).
Price and Consensus: BKR
SLB
SLB’s diversified business portfolio, leadership in digital technology, and strategic expansions into low-carbon and data center markets position it to sustain its growth and margins, even though upstream investments are moderating. Zacks #3 Ranked SLB also has a strong focus on shareholder returns and running its business efficiently. You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.
Price and Consensus: SLB
Halliburton
Halliburton, with a Zacks Rank of 3, is a leading oilfield service player with strong cash flow and smart investments in growth areas. While the industry faces ups and downs, its innovations and global reach should keep it ahead of competitors. Notably, HAL has identified four key growth areas comprising drilling technologies, unconventionals, well intervention and artificial lift with the potential to contribute $2.5 to $3 billion in annual revenues within the next three to five years.
Price and Consensus: HAL