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3 Oil & Gas Equipment Stocks to Gain From the Promising Industry

Oil price is still extremely favorable for exploration and production activities. Handsome upstream activities are leading to solid demand for drilling & production equipment, thereby brightening the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.

Investors like the plans for inorganic expansion and reducing Scope 1 and 2 emissions. Some oil & gas equipment stocks have a strong balance sheet with no debt load, probably helping them sail through various business uncertainties. Frontrunners in the industry include NOW Inc. DNOW, Dril-Quip, Inc. DRQ and Oil States International, Inc. OIS.  

About the Industry

The Zacks Oil and Gas - Mechanical and Equipment industry comprises companies that provide necessary oilfield equipment — production machinery, pumps, valves and several other drilling appliances like rig components — to exploration and production companies. These help upstream energy players extract crude oil and natural gas from fields, both onshore and offshore. Hence, the well-being of oilfield equipment businesses is positively correlated to expenditures by upstream companies. These companies receive deals from integrated energy firms and independent as well as national oil and gas companies. Oilfield equipment providers also design, manufacture, engineer and install products used to treat and process crude oil, natural gas and others. Their products comprise gadgets and instruments for gas compression packages and water treatment works.

What's Shaping the Future of the Oil & Gas Equipment Industry?

Drilling & Production Equipment Demand to Improve: Oil price is trading at more than $65 per barrel. Oil price, which is still favorable, is helping explorers and producers ramp up upstream activities, leading to handsome demand for drilling & production equipment of the companies belonging to the industry.

Inorganic Expansion: To thrive in the competitive market, many companies belonging to the industry believe that inorganic expansion is the key. The strategy will also probably aid the players in maximizing shareholder value. The acquisition framework will mostly aim at those businesses with the potential for generating stable revenues and intellectual property advantages.

Reduction in Scope 1 and 2 Emissions: To lower Scope 1 and 2 emissions, oil & gas equipment companies are launching decarbonization initiatives. This will aid the players in limiting global warming.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Oil and Gas - Mechanical and Equipment is a seven-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #124, which places it in the top 50% 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 bullish 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 want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector, Lags S&P 500

The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector, but underperformed the Zacks S&P 500 composite over the past year.

The industry has fallen 3.1% in the past year compared with the broader sector’s decline of 7.5%. The S&P 500 has declined 1.7% in the same time frame.

One-Year Price Performance

Industry's Current Valuation

Since oilfield equipment providers 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 8.95X, lower than the S&P 500’s 12.49X. However, it is higher than the sector’s trailing-12-month EV/EBITDA of 2.72X.

Over the past five years, the industry has traded as high as 31.42X, as low as 2.37X, and with a median of 11.04X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 Oil & Gas Equipment Stocks Leading the Pack

NOW Inc: NOW is well known for offering a comprehensive line of products and solutions to energy companies worldwide that are involved in upstream, midstream and downstream activities. With an operating history of 160 years, NOW provides support to onshore and offshore activities in prolific oil and gas resources across the world.

With no outstanding long-term debt, NOW has a strong balance sheet. The stock, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 7.4% this year.

Price and Consensus: DNOW

Oil States International, Inc: Oil States International focuses on capital and cost discipline. Owing to this discipline, amid improving industry fundamentals, the firm is witnessing increasing revenues and EBITDA.

The company, carrying a Zacks Rank of 3, has a strong balance sheet since it has significantly lower exposure to debt capital than composite stocks belonging to the industry. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: OIS

Dril-Quip, Inc: Dril-Quip is a well-known name in manufacturing highly engineered drilling & production equipment. It enjoys a strong balance sheet with no debt load.

The firm, holding a Zacks Rank #2 (Buy), has also set up a Scope 1 and Scope 2 GHG emissions reduction target to limit global warming.

Price and Consensus: DRQ

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

NOW Inc. (DNOW) : Free Stock Analysis Report

Dril-Quip, Inc. (DRQ) : Free Stock Analysis Report

Oil States International, Inc. (OIS) : Free Stock Analysis Report

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