Zacks Industry Outlook Highlights Seadrill, Patterson-UTI Energy and Precision Drilling
For Immediate Release
Chicago, IL – August 22, 2023 – Today, Zacks Equity Research discusses Seadrill Ltd. SDRL, Patterson-UTI Energy PTEN and Precision Drilling Corp. PDS.
Industry: Oil & Gas - Drilling
Link: https://www.zacks.com/commentary/2138537/3-stocks-in-the-oil-gas-drilling-industry-with-steady-growth-paths
While commodity price volatility has led to some reduction in activity, the Zacks Oil and Gas - Drilling industry still seems to be a good place for investors for the near-to-medium term. In particular, we expect work to stabilize and are optimistic that the recent strength in oil prices may positively impact future drilling activity despite some concerns.
The factor we recommend paying attention to is the strong demand in larger, oilier basins that are expected to drive the space higher going forward. Although macro challenges might occasionally lead to some moderation in activity, we think the industry still has fuel left in the tank, especially for operators that target growth opportunities and operating efficiency initiatives. We advise investors to focus on Seadrill Ltd., Patterson-UTI Energy and Precision Drilling Corp.
Industry Overview
The Zacks Oil and Gas - Drilling industry consists of companies that provide rigs (or specialized vehicles) on a contractual basis to explore and develop oil and gas. These operators offer drilling rigs (both land-based/onshore and offshore), equipment, services and manpower to exploration and production companies worldwide. Drilling for hydrocarbons is costly and technically difficult, and its future primarily depends on contracting activity and the total number of available rigs at a given time rather than the price of oil or gas.
Within the industry, it's interesting to note that the volatility associated with offshore drilling companies is much higher than their onshore counterparts and their share prices are more correlated to the price of oil. Overall, drilling stocks are among the most volatile in the entire equity market.
3 Trends Defining the Oil and Gas - Drilling Industry's Future
Incremental Activity Seen in Near Future: Despite slowing a bit in recent times due to volatility in commodity prices and certain macro factors, activity is expected to improve later in the year and in 2024 in North America — a region most drillers depend on. In fact, upstream operators (particularly in North America) are likely to be drilling more wells to increase output that has remained depressed over the past few years due to lack of investment, supply-chain issues, scarcity of labor and equipment attrition.
With domestic oil and natural gas output set to go up, drilling companies stand to benefit. As far as the international market is concerned, one can see prospects for increases in activity across a number of major geographies.
Low Reserve Replacements a Silver Lining: One of the key positive arguments for drillers is the focus on the reserve replacement rate. Over the past few years, the supermajors have struggled to replace all of the oil and gas they churn out, raising concerns about future production. In this context, Chevron's 10-year reserve replacement ratio of 100% indicates the inability to add proved reserves to the amount of oil and gas produced. This clearly calls for a calibrated approach in meeting reserve shortfalls in the long run. Consequently, a gradual improvement in drilling activity looks likely.
Wind-Down of Legacy, High-Margin Contracts: For most operators, order levels have remained depressed, and day rates are trending just above cash costs despite the strong rebound in commodity prices. This has put increased pressure on their revenue-generating capacity. Further, as the companies' legacy, high-margin contracts wind down slowly, the drillers are faced with the prospect of a drop in backlog (and consequently, revenues), which is likely to accelerate over the next few quarters. This also leaves drillers vulnerable to addressing their massive debt maturities and investment in newbuilds.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - Drilling industry is a 9-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #103, which places it in the top 42% of 246 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat 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.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it's worth taking a look at the industry's shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - Drilling industry has fared better than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has gone up 53.9% over this period compared with the broader sector's increase of 2.8%. Meanwhile, the S&P 500 has gained 6%.
Industry's Current Valuation
Since oil and gas drilling 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 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 17.79X, higher than the S&P 500's 13.07X. It is also well above the sector's trailing-12-month EV/EBITDA of 3.40X.
Over the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 12.53X.
3 Oil and Gas - Drilling Stocks to Watch
Seadrill Limited: Seadrill is a market-leading international driller with strong exposure in key strategic basins like the U.S. Gulf of Mexico, Brazil and Angola. Following the Aquadrill LLC acquisition earlier this year, SDRL has improved its cash flow generation potential significantly. A robust balance sheet, enhanced liquidity and credit profile are other positives in the Seadill story. The company has transformed its capital structure through accretive transactions and continues to deliver operational excellence.
The Zacks Consensus Estimate for this offshore driller's 2023 earnings has been revised 67.4% upward over the past 90 days. SDRL has a trailing four-quarter earnings surprise of roughly 89.2%, on average. Seadrill carries a Zacks Rank #3 (Hold) and its shares have gone up 88.9% in a year.
You can see the complete list of today's Zacks #1 Rank stocks here.
Patterson-UTI Energy: Patterson-UTI Energy's business is set to benefit from its proprietary design and technologically advanced 'Apex' rigs that can move faster than conventional rigs, drill quicker, and are better suited to new-age drilling. Meanwhile, the company's acquisition of Pioneer Energy Services has boosted its scale and geographic presence. Apart from getting hold of 16 super-spec rigs, PTEN will profit from Pioneer's well-organized operations in Colombia. The company's financial profile looks solid too.
The 2023 Zacks Consensus Estimate for this Houston, TX-based company indicates 130.8% earnings per share growth over 2022. PTEN currently carries a Zacks Rank of 3. The stock has lost 3.5% in a year.
Precision Drilling: This #3 Ranked company is Canada's largest drilling rig contractor. A provider of rentals, wellsite accommodations/catering and snubbing services, Calgary-headquartered Precision Drilling has active operations in the United States, Mexico and Saudi Arabia. In particular, PDS' market-leading Alpha digital technology portfolio provides it with a competitive edge. A tight rig market, together with strength in the company's activity levels, should result in higher dayrates and an improving contract book. Precision Drilling's prudent cost management and technological leadership are its other growth drivers.
The 2023 Zacks Consensus Estimate for PDS indicates 599.5% earnings per share growth over 2022. The company beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. Precision Drilling stock has gained 4.4% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
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.
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
Patterson-UTI Energy, Inc. (PTEN) : Free Stock Analysis Report
Seadrill Limited (SDRL) : Free Stock Analysis Report
Precision Drilling Corporation (PDS) : Free Stock Analysis Report
