3 Oil & Gas Equipment Stocks to Gain Despite Industry Challenges
Although oil price is favorable, it is still lower than what it was in the prior year. This is likely to lower the demand for drilling & production equipment, thereby making the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry gloomy.
Declining cash flows and significant debt exposures are also a matter of concern, making it difficult for companies to build a solid foundation to sail through various business uncertainties. Some of the stocks that are trying to survive the industry challenges are Dril-Quip, Inc. DRQ, Matrix Service Company MTRX and Profire Energy Inc PFIE.
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 Decline: The oil pricing scenario was significantly healthier last year and the trend will likely continue this year too. Thus, there will likely be lesser exploration and production activities, which, in turn, will lead to lower demand for drilling & production equipment of the companies belonging to the industry.
Lower Production: Exploration and production companies are being asked by investors to focus more on shareholders’ returns rather than solely allocating capital for the production of oil and gas. This is reducing the growth rate of production, thus hurting drilling & production equipment demand.
Declining Operating Cashflows: Over the quarters, the companies belonging to the industry as a whole are witnessing declining net operating cash flow, suggesting weakness in core operations. Also, the composite stocks belonging to the industry have significantly higher exposure to debt capital as compared to the broader energy sector.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Oil and Gas - Mechanical and Equipment is an eight-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #233, which places it in the bottom 7% 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 dull 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 & S&P 500
The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has gained 22.7% in the past year compared with the broader sector’s improvement of 11.4% and S&P 500’s 16.4% increase.
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 9.30X, lower than the S&P 500’s 13.90X. However, it is higher than the sector’s trailing-12-month EV/EBITDA of 3.02X.
Over the past five years, the industry has traded as high as 25.62X, as low as 2.37X, and with a median of 10.44X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges
Dril-Quip, Inc: It 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 #3 (Hold), has also set up a Scope 1 and Scope 2 GHG emissions reduction target to limit global warming.
Price and Consensus: DRQ
Matrix Service: It is a popular name in the space of proving engineering and construction services to the energy and industrial markets. Matrix, carrying a Zacks Rank of 3, has been witnessing a sustained momentum in project awards, which is helping it to secure incremental cashflows. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: MTRX
Profire Energy: It is a leading provider of powerful and safe burner and combustion management solutions. #3 Ranked PFIE’s business is mainly focused on the energy sector’s upstream, midstream and downstream areas. Profire Energy is highly focused on expanding its product solutions in oil and gas operations that have new opportunities.
Price and Consensus: PFIE
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Dril-Quip, Inc. (DRQ) : Free Stock Analysis Report
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