Oil and gas prices are still extremely favorable for exploration and production activities. Higher upstream activities are leading to improvement in demand for drilling & production equipment, thereby brightening the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.
Investors like the plans for inorganic expansion and reducing Scope 1 and 2 emissions. Some oil & gas equipment stocks have a strong balance sheet with no debt load, probably helping them sail through various business uncertainties. Frontrunners in the industry include NOW Inc. DNOW, Dril-Quip, Inc. DRQ and Oil States International, Inc. OIS.
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 also comprise gadgets and instruments used in gas compression packages and water treatment works.
What’s Shaping the Future of the Oil & Gas Equipment Industry?
Drilling & Production Equipment Demand to Improve: Oil price is trading at more than $75 per barrel. Favorable oil price is helping explorers and producers ramp up upstream activities, leading to higher demand for drilling & production equipment of the companies belonging to the industry.
Inorganic Expansion: To thrive in the competitive market, many companies belonging to the industry believe that inorganic expansion is the key. The strategy will also probably aid the players in maximizing shareholder value. The acquisition framework will mostly aim at those businesses with the potential for generating stable revenues and intellectual property advantages.
Reduction in Scope 1 and 2 Emissions: To lower Scope 1 and 2 emissions, oil & gas equipment companies are launching decarbonization initiatives. This will aid the players in limiting global warming.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Oil and Gas – Mechanical and Equipment is an 8-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #103, which places it in the top 41% 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 bullish 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 S&P 500, Sector
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 jumped 23.2% in the past year compared with the broader sector’s rise of 12.3%. The S&P 500 has declined 8.3% in the same time frame.
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 11.13X, lower than the S&P 500’s 12.46X. However, it is higher than the sector’s trailing-12-month EV/EBITDA of 3.18X.
Over the past five years, the industry has traded as high as 30.04X, as low as 2.52X, and with a median of 10.70X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Equipment Stocks to Gain
NOW Inc: NOW is a well-known name in offering a comprehensive line of products and solutions to energy companies worldwide that are involved in upstream, midstream and downstream activities. With an operating history of 160 years, NOW provides support to onshore and offshore activities in prolific oil and gas resources across the world.
With no outstanding long-term debt, NOW has a strong balance sheet. The stock, carrying a Zacks Rank #3 (Hold), has gained 49.3% in the past year, backed by its ability to sail through business uncertainties.
Price and Consensus: DNOW
Oil States International, Inc: Oil States International focuses on capital and cost discipline. Owing to this discipline, amid improving industry fundamentals, the firm is witnessing increasing revenues and EBITDA.
The company, carrying a Zacks Rank of 3, is also witnessing improvement in its Well Site Services segment, thanks to increased land-based completion and production activity.
Price and Consensus: OIS
Dril-Quip, Inc: Dril-Quip is a well-known name in manufacturing highly engineered drilling & production equipment. It enjoys a strong balance sheet with no debt load.
The Zacks #3 Ranked stock has also set up a Scope 1 and Scope 2 GHG emissions reduction target to limit global warming.
Price and Consensus: DRQ
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NOW Inc. (DNOW) : Free Stock Analysis Report
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Oil States International, Inc. (OIS) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
