4 Oilfield Services Stocks Set to Escape Industry Weakness
Inflation is still high, thereby continuing to raise concerns about an economic slowdown. This could hurt exploration and production activities, which in turn could lower oilfield service demand. Strict capital discipline by upstream energy companies is also acting as a dampener, making the outlook for the Zacks Oil and Gas- Field Servicesindustry gloomy.
Among the companies in the industry that will probably survive the business challenges are Schlumberger Limited SLB, Halliburton Company HAL, Weatherford International plc WFRD and RPC Inc. RES.
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, as well as 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 Oilfield Services Industry's Future
Inflationary Pressure: The market is cheering as with the decline in fuel prices, U.S. inflation recently hit the lowest mark since 2021. However, many analysts have warned that the underlying inflation is still stubbornly high, spurring market volatility. This could hurt energy demand, which might affect oil prices. Thus, upstream businesses of the integrated energy players are still under pressure, which could affect oilfield service demand.
Lower Upstream Spending: Higher labor and material expenses are hurting profit margins, thereby limiting spending by upstream players for exploration and production activities. Also, upstream players mainly focus on stockholder returns than boosting output since investors ask companies to return more cash. These are the prime factors justifying limitations in supply growth as upstream companies will continue to focus on capital discipline, despite the recent decision from Saudi Arabia, the top producer of the OPEC cartel, of another 1 million barrels per day production cut from July. Thus, a slowdown in production growth could hurt demand for oilfield services.
Declining Free Cashflows: In the first quarter, composite stocks belonging to the industry witnessed a massive 78.1% decline in collective net cash flows from operations. This could be an indication of a slowdown in demand for overall oilfield services.
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 #226, which places it in the bottom 10% 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, Outperforms Sector
The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite, but outperformed the broader Zacks Oil – Energy sector over the past year.
The industry has soared 13.8% over this period compared with the S&P 500’s gain of 19.2% and the broader sector’s 1.1% improvement.
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 7.91X compared with the S&P 500’s 13.26X and sector’s 2.81X.
Over the past five years, the industry has traded as high as 12.17X, as low as 0.98X, with a median of 7.70X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oilfield Services Stocks Moving Ahead of the Pack
Schlumberger Limited: Schlumberger is well known for transforming the oil and gas industry by employing its cutting-edge solutions. With its quantifiably proven solutions, it is lowering emissions and related impacts. Schlumberger, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 38.1% this year.
Price and Consensus: SLB
Weatherford is a key energy player and is engaged in offering exclusive drilling technologies that will maximize clients’ reservoir exposure. Weatherford is also involved in well construction and completion activities in an efficient manner. WFRD currently sports a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: WFRD
Halliburton Company: Halliburton is also a leading oilfield service player, capitalizing on improving demand for oilfield services. HAL is expecting growth in the international market, while values in the North American market are getting maximized. The firm, with a Zacks Rank of 3, is likely to see earnings growth of more than 45% this year.
Price and Consensus: HAL
RPC Inc: RPC is a leading energy name offering a wide range of oilfield services to key exploration and production players. It has a conservative balance sheet and a proven business model that can sail through numerous oilfield cycles.
Carrying a Zacks Rank #3, RPC has strong capabilities in executing multi-stage completion activities in unconventional wells.
Price and Consensus: RES
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Schlumberger Limited (SLB) : Free Stock Analysis Report
Halliburton Company (HAL) : Free Stock Analysis Report
RPC, Inc. (RES) : Free Stock Analysis Report
Weatherford International PLC (WFRD) : Free Stock Analysis Report
