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Zacks Industry Outlook Highlights: Schlumberger, Baker Hughes, Halliburton and KLX Energy Services

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For Immediate Release

Chicago, IL – January 21, 2021 – Today, Zacks Equity Research discusses Oilfield Services, including Schlumberger Limited SLB, Baker Hughes Company BKR, Halliburton Company HAL and KLX Energy Services Holdings, Inc. KLXE.

Link:https://www.zacks.com/commentary/1249045/4-oilfield-services-stocks-countering-industry-headwinds

The coronavirus pandemic has caused massive global energy demand destruction since early2020. The challenges in the path of energy demand growth and an oversupplied market are keeping upstream operations under check. The situation has further marred the Zacks Oil and Gas- Field Services industry outlook.

However, with people gradually returning to work and multiple vaccine rollouts occurring around the globe, prospects for oilfield service providers have somewhat improved. SchlumbergerBaker Hughes Company , Halliburton Company and KLX Energy Services Holdings are among the frontrunners in the industry that are trying to transcend coronavirus blues.

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 as well as drilling equipment, leasing of drilling rigs, seismic testing, transport and directional solutions, among others.

4 Trends Defining Oilfield Services Industry’s Future

Pandemic Worries: The highly contagious U.K. variant of coronavirus is spreading rapidly in the United States, which alerted the health authorities. Moreover, the second wave is affecting several European markets, triggering more lockdowns and decline in demand. This is keeping energy exports under check. The situation has thus kept the demand for oil and gas under pressure, making oilfield services companies’ outlook gloomy.

Tepid Upstream Investments: Exploration and production companies are now constrained by a reduction in borrowing capacity and an increase in the cost of capital. Also, explorers are facing constant pressure from their investors for higher returns instead of rapid production growth. These headwinds are keeping investments from upstream players in the land market of North America low.

Hence, conservative spending by clients and weak North American drilling are likely to hurt the demand for oilfield service providers. This London-based company’s Surface Technologies segment is facing the brunt of weak North American drilling operations and unfavorable product mix.

Rising Competition: With scaled down upstream investment, the existing oilfield services companies are fighting hard for the available funds. As a result, intensified competition in the domestic market has left limited room for oilfield services providers to charge premium prices for the services being offered. Moreover, the slowdown of demand for pressure pumping services in the U.S. shale plays last year has marred several companies’ prospects.

International Market Opportunities: While the domestic market is expected to fight its own battle, the international market can drive growth for oilfield service providers. Regions like the Middle East, North Sea and others are expected to provide opportunities to companies with major global presence.

For e.g., Schlumberger, which has lost some opportunities in Saudi Arabia due to OPEC+ production curtailment, will likely be able to offset the negatives with rising activities in Kuwait and Qatar. Moreover, investments are expected to increase.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil and Gas – Field Services is a 28-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #236, 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 bearish 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have moved 47.2% downward in the past year, the same for 2021 have slumped 45.3%.

Before we present a few stocks that you may want to buy or retain, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Beats Sector, Lags S&P 500

The Zacks Oil and Gas - Field Services industry has outperformed the broader Zacks Oil - Energy sector but lagged the Zacks S&P 500 composite over the past year.

The industry has declined 2.5% in the past year compared with the broader sector’s fall of 21.4%. The S&P 500 has gained 15.2% in the same timeframe.

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 4.06X compared with the S&P 500’s 17.07X and sector’s 4.31X.

Over the past five years, the industry has traded as high as 13.75X, as low as 1.93X, with a median of 9.36X.

4 Oilfield Services Stocks Trying to Fend Off Industry Challenges

Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while, or buying one Zacks Rank #2 (Buy) stock and holding on to three fundamentally-sound Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KLX EnergyServices Holdings: Headquartered in Houston, TX, KLX Energy provides services in the U.S. onshore hydrocarbon producing areas. It has a footprint in major locations including Bakken, Eagle Ford, Permian, Rockies, Marcellus, Utica and others. It also provides several proprietary technologies and products to clients for a smooth production process.

The Zacks Rank #2 company’s bottom line is likely to jump 20.1% year over year in the current year. Its huge liquidity position of $106.2 million will likely provide it with enough financial flexibility to navigate through the current volatile energy market environment.

Halliburton Company: Houston, TX-based Halliburton Company is one of the largest oilfield service providers in the world. The company's ability to generate positive free cash flow even in a tough market environment indicates operational strength. Halliburton’s healthy relationship with national oil companies and digitization efforts bode well. This company is likely to see earnings growth of 13.3% in the next five years.

With the stock jumping 61.2% in the past three months, this Zacks Rank #3 company’s core strength in providing best-in-class cementing, stimulation, intervention and completion services bolsters prospects. Its bottom line for 2021 is expected to grow 16.1% year over year.

Schlumberger: Houston, TX-based Schlumberger helps upstream energy players locate oil and gas, as well as drill and evaluate hydrocarbon wells. Its greater reliance on the lucrative international market is appreciable. With shares of the company surging 64.1% in the past three months, Schlumberger — a leading provider of technology for complex oilfield projects — is better positioned than most peers to take up new offshore projects in shallow water basins outside North America.

The company is likely to see earnings growth of 5.5% in the next five years. The Zacks Rank #3 company’s decision to cut quarterly dividend payments is likely to save cash outflows amid an unfavorable business scenario and enable it to navigate through the current uncertainties. Notably, the stock has seen significant upward revision of the 2021 bottom line estimate in the past 60 days.

Baker Hughes Company: Based in Houston, TX, this is one of the world’s largest oilfield service providers that sell technologies and services to different clients. It is well equipped with technologies to serve explorers focusing more on shale and offshore deep-water oil and gas rather than conventional production.

This Zacks Rank #3 company is likely to see earnings growth of 16.2% in the next five years. The stock has increased 67.8% in the past three months and has more room for growth. The company’s plan to extend its reach beyond oil fields to capitalize on LNG contracts is commendable.

Encouragingly, it has a strong balance sheet, which will provide the company with financial flexibility. Notably, the stock has seen five positive estimate revisions and no downward movement for the 2021 bottom line in the past 30 days.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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Schlumberger Limited (SLB) : Free Stock Analysis Report
 
Halliburton Company (HAL) : Free Stock Analysis Report
 
Baker Hughes Company (BKR) : Free Stock Analysis Report
 
KLX Energy Services Holdings, Inc. (KLXE) : Free Stock Analysis Report
 
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