The Zacks Oil-Energy Sector has taken a beating this year, falling almost 20% year to date, amid various challenges including volatility in oil prices, U.S.-China trade tussle, oversupplied market and weakening demand outlook. West Texas Intermediate (WTI) started the year just above $60 per barrel of oil and touched multi-year highs of more than $76 in early October. However, the rally was pretty short-lived, with the commodity plunging more than 40% since then on fears of supply glut and economic headwinds.
Despite crude being on an upward trajectory for most part of 2018 and shale producers still reaping profits, the picture for the oilfield services players has not been quite rosy. The industry has struggled with forced efficiencies, reduced day rates and diminishing backlogs, which affected earnings and revenues of most companies.
In fact, amid various headwinds, shares of Halliburton Company HAL — the world’s second largest oilfield services company — have declined 48.6% year to date compared with the industry’s decline of 44.6%.
Factors Plaguing Halliburton
Considering the fact that Halliburton derives most of its revenues from North American operations, pipeline takeaway constraints in the Permian are primarily impacting the stock’s prospects. Notably, on Halliburton’s second-quarter call, management had warned investors that a slowdown in production growth in the Permian Basin due to infrastructural bottlenecks will weigh on the company’s earnings for the remainder of 2018.
In fact, very recently, Schlumberger Limited SLB — the world’s largest oilfield service player— warned of weakness in the North American hydraulic fracturing market, which is likely to impact its revenues till the first half of 2019. This has further weakened the outlook for Halliburton as North American business constitutes the major chunk of the firm’s revenues.
Basically, transportation bottlenecks in the Permian Basin have forced domestic producers to cut down on their production and spending levels, dampening the demand for Halliburton’s market-leading hydraulic fracturing services in North America.
Halliburton remains heavily levered to changes in the overall energy price environment, and the recent pullback in oil prices is likely to cause more trouble for the stock. These price headwinds and Permian pipeline pinch are adding to the woes grappling the stock, including the failure of its proposed merger with Baker Hughes that is still causing problems for its balance sheet. The deal was called off in early 2016, forcing Halliburton to book $3.5 billion in termination fees —one of the largest of these charges in U.S. corporate history. As a result, Halliburton is now facing a stretched balance sheet, representing a debt-to-capitalization ratio of 53.6%, which is more than double the industry average of 24.0%.
Notably, we also notice weakness in the valuation metrics of the stock as its EV/EBITDA ratio stands at 5.76 compared with the industry’s 5.29. Consequently, this Zacks Rank #5 (Strong Sell) stock has been witnessing downward revisions lately. The Zacks Consensus Estimate for the company’s earnings in 2019 has declined 14 cents to $2.03 per share in the past 30 days. Hence, this further limits the company’s upside potential. Moreover, the company’s 2019 projected earnings per share growth rate of 9.1% is lower than the industry average of 23.7%. Estimates are not on Halliburton’s side either, with six analysts revising their estimates downward in the past 30 days for this year. Hence, the stock does not look promising at present.
Buy These 4 Oilfield Service Stocks Instead
With takeaway capacity concerns aggravating, many producers have now become reluctant to increase their spending levels until the takeaway problem is sorted. While there are several Permian pipeline projects lined up, it will definitely take a year or more for everything to settle in place. Reduced spending, lower production activities along with falling oil prices are likely to hit the oilfield services players once again.
Therefore, the overall scenario does not look very encouraging for Zacks Oil and Gas - Field Services industry as of now. Unfortunately, the “Oil And Gas - Field Services” industry carries a Zacks Industry Rank #189, which places it in the bottom 27% of more than 250 Zacks industries, and good options look sparse right now. Hence, we suggest investors looking at this specific industry to broaden their search.
Below we have zeroed in on stocks from the broader oil and energy space. These stocks currently carry a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and flaunt a VGM Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Unit Corporation UNT: It is an integrated energy company with operations including exploration and production, midstream gathering and processing, and a drilling rig business. Thjs Tulsa, OK-based stock currently carries a Zacks Rank #1 and has a VGM Score of A. The company has an expected earnings growth of 64.7% for the next year. Over 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 44.6%.
Cabot Oil & Gas Corporation COG: It is engaged in high-impact natural gas-focused drilling in the Marcellus Shale. The Houston, TX-based stock currently carries a Zacks Rank #2 and has a VGM Score of B. The company has an expected earnings growth of 63.4% for the next year. Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 15.2%.
SilverBow Resources, Inc. SBOW: This Houston, TX-headquartered oil and gas explorer — focused on the Eagle Ford shale located in South Texas — has a Zacks Rank #2 and a VGM Score of A. The company has an expected earnings growth of 67.3% for the next year. Over the past 60 days, the company has seen the Zacks Consensus Estimate for 2019 increase 18.5%.
Archrock, Inc. AROC: Archrock is a leading player in the natural gas compression and transmission business. The Houston, TX-based company carries a Zacks Rank #2 and has a VGM Score of A. The company has an expected earnings growth of 48.2% for the next year. Over the past 60 days, Archrock has seen the Zacks Consensus Estimate for 2019 increase 3.8%.
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Unit Corporation (UNT) : Free Stock Analysis Report
Schlumberger Limited (SLB) : Free Stock Analysis Report
Halliburton Company (HAL) : Free Stock Analysis Report
Archrock, Inc. (AROC) : Free Stock Analysis Report
Cabot Oil & Gas Corporation (COG) : Free Stock Analysis Report
SilverBow Resources Inc. (SBOW) : Free Stock Analysis Report
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