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Conservative Upstream Budget to Hurt Oilfield Services Firms
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The Zacks Oil and Gas- Field Services industry comprises companies that primarily engage in providing support services to upstream players. These companies help in manufacturing, repairing and maintaining wells and drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among other services.
Let’s take a look at the industry’s three major themes:
Although the phase-one trade agreement is solving a few issues of the United States, there are much tougher needs to be addressed, raising concerns that the tariff war between Washington and Beijing may again escalate. The threat to economic growth might hurt global energy demand, denting outlook for oil prices. This could also affect operations of the explorers in North America, thereby ailing oilfield services players in the long term.
The count of drilling rigs in the U.S. shale plays declined year over year, per Baker Hughes Company (BKR - Free Report) data. This reflects conservative capital spending by domestic explorers, thereby hitting the number of contracts for oilfield services. For example, TechnipFMC plc (FTI - Free Report) , a leading manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry, witnessed 28.4% year-over-year decline in inbound orders in third-quarter 2019. However, in the international market, the count of drilling rigs is rising, which can benefit large oilfield service players with ample international exposure.
Oilfield service providers are reeling under a heavy debt burden and lower cash flows, weighing on their near-term credit quality. This makes survival difficult for the concerned companies as the oilfield service market in North America is highly competitive. While the large-cap entities are more poised to regain their credit strength, the smaller players are likely to go through a rough patch.
Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Oil and Gas – Field Services is a 56-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #240, which places it in the bottom 5% 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 tepid 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined almost 22.6%.
Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Beats Sector, Lags S&P 500
The Zacks Oil and Gas - Field Services industry has outperformed the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.
The industry has surged 32.7% in the past year compared with the broader sector’s rise of 2.7%. The S&P 500 has rallied 28.4% in the same time frame.
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 5.25X, compared with the S&P 500’s 11.93X and the sector’s 5.01X.
Over the past five years, the industry has traded as high as 13.43X, as low as 4.70X, with a median of 8.65X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The North American market is currently under pressure with dwindling rig counts and tightened capital budget by the upstream companies. However, the international markets are improving, where the count of drilling rigs is bumping up and final investment decisions for clients’ projects are on the ascent. The tailwinds, reported by Schlumberger Limited (SLB - Free Report) , supports its projection of 7-8% climb in spending by upstream energy firms through 2019 in overseas markets. Thus, oilfield service providers are likely to see buoyant demand for their products on the foreign shores.
We are presenting three stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
Halliburton Company (HAL - Free Report) : Houston, TX-based Halliburton Company is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance plus engineering and construction services to the energy, industrial and government sectors. This Zacks #3 Ranked stock has an expected earnings growth rate of almost 11% for 2020.
Price and Consensus: HAL
Linde plc (LIN - Free Report) : Based in Guildford, UK, the company is an industrial gas and engineering service provider. This #3 Ranked company has an expected earnings growth rate of 11.3% for 2020.
Price and Consensus: LIN
Schlumberger Limited (SLB - Free Report) : Houston, TX-based Schlumberger helps the upstream energy players locate oil and gas as well as drill and evaluate hydrocarbon wells. The company with a Zacks Rank of 3 is expected to witness year-over-year growth of 17.2% in bottom line during 2020.
Price and Consensus: SLB
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Image: Bigstock
Conservative Upstream Budget to Hurt Oilfield Services Firms
The Zacks Oil and Gas- Field Services industry comprises companies that primarily engage in providing support services to upstream players. These companies help in manufacturing, repairing and maintaining wells and drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among other services.
Let’s take a look at the industry’s three major themes:
Although the phase-one trade agreement is solving a few issues of the United States, there are much tougher needs to be addressed, raising concerns that the tariff war between Washington and Beijing may again escalate. The threat to economic growth might hurt global energy demand, denting outlook for oil prices. This could also affect operations of the explorers in North America, thereby ailing oilfield services players in the long term.
The count of drilling rigs in the U.S. shale plays declined year over year, per Baker Hughes Company (BKR - Free Report) data. This reflects conservative capital spending by domestic explorers, thereby hitting the number of contracts for oilfield services. For example, TechnipFMC plc (FTI - Free Report) , a leading manufacturer and supplier of products, services and fully integrated technology solutions for the energy industry, witnessed 28.4% year-over-year decline in inbound orders in third-quarter 2019. However, in the international market, the count of drilling rigs is rising, which can benefit large oilfield service players with ample international exposure.
Oilfield service providers are reeling under a heavy debt burden and lower cash flows, weighing on their near-term credit quality. This makes survival difficult for the concerned companies as the oilfield service market in North America is highly competitive. While the large-cap entities are more poised to regain their credit strength, the smaller players are likely to go through a rough patch.
Zacks Industry Rank Indicates Cloudy Prospects
The Zacks Oil and Gas – Field Services is a 56-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #240, which places it in the bottom 5% 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 tepid 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined almost 22.6%.
Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Beats Sector, Lags S&P 500
The Zacks Oil and Gas - Field Services industry has outperformed the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.
The industry has surged 32.7% in the past year compared with the broader sector’s rise of 2.7%. The S&P 500 has rallied 28.4% in the same time frame.
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 5.25X, compared with the S&P 500’s 11.93X and the sector’s 5.01X.
Over the past five years, the industry has traded as high as 13.43X, as low as 4.70X, with a median of 8.65X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The North American market is currently under pressure with dwindling rig counts and tightened capital budget by the upstream companies. However, the international markets are improving, where the count of drilling rigs is bumping up and final investment decisions for clients’ projects are on the ascent. The tailwinds, reported by Schlumberger Limited (SLB - Free Report) , supports its projection of 7-8% climb in spending by upstream energy firms through 2019 in overseas markets. Thus, oilfield service providers are likely to see buoyant demand for their products on the foreign shores.
We are presenting three stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Halliburton Company (HAL - Free Report) : Houston, TX-based Halliburton Company is one of the largest oilfield service providers in the world, offering a variety of equipment, maintenance plus engineering and construction services to the energy, industrial and government sectors. This Zacks #3 Ranked stock has an expected earnings growth rate of almost 11% for 2020.
Price and Consensus: HAL
Linde plc (LIN - Free Report) : Based in Guildford, UK, the company is an industrial gas and engineering service provider. This #3 Ranked company has an expected earnings growth rate of 11.3% for 2020.
Price and Consensus: LIN
Schlumberger Limited (SLB - Free Report) : Houston, TX-based Schlumberger helps the upstream energy players locate oil and gas as well as drill and evaluate hydrocarbon wells. The company with a Zacks Rank of 3 is expected to witness year-over-year growth of 17.2% in bottom line during 2020.
Price and Consensus: SLB
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>