Handsome oil prices are set to drive exploration and production, boosting demand for drilling and production equipment. This trend enhances the outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.
Investors remain optimistic about the sector's inorganic growth strategies and focus on reducing Scope 1 and 2 emissions. With strong balance sheets and minimal debt, many companies offer resilience against market volatility. Key players include Oil States International Inc OIS, PEDEVCO Corp PED and Kodiak Gas Services KGS.
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 onshore and offshore. Hence, the well-being of oilfield equipment businesses is 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 that treat and process crude oil, natural gas and others. Their products comprise gadgets and instruments for gas compression packages and water treatment works.
What's Shaping the Future of the Oil & Gas Equipment Industry?
Drilling & Production Equipment Demand to Improve: The demand for drilling and production equipment is likely to remain strong, as West Texas Intermediate (WTI) crude is currently hovering around $70 per barrel. Given that the current WTI crude price is well above the breakeven point for existing wells in the major shale plays, there will be strong incentives for exploration and production activities. This will drive robust demand for drilling and production equipment among companies in the industry.
Inorganic Expansion: In the competitive market landscape, numerous industry players prioritize inorganic expansion. This approach is anticipated to enhance shareholder value by targeting acquisitions of businesses that offer stable revenue streams and intellectual property benefits.
Reduction in Scope 1 and 2 Emissions: Oil and gas equipment companies are implementing decarbonization initiatives to reduce Scope 1 and 2 emissions, aligning with global sustainability goals. These measures not only contribute to mitigating global warming but also position these companies favorably within the increasingly environmentally conscious market. By adopting advanced technologies and operational efficiencies, these firms are not only addressing regulatory pressures but also boosting their long-term sustainability and attractiveness to investors focused on Environmental, Social and Governance criteria.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #30, which places it in the top 12% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is 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 look at the industry’s recent stock market performance and valuation picture.
Industry Outperforms Sector, S&P 500
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 risen 21.9% in the past year, surpassing the broader sector’s improvement of 7.3% and the S&P 500’s growth of 19.9%.
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.
Based on the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 9.84X, lower than the S&P 500’s 17.33X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 4.30X.
Over the past five years, the industry has traded as high as 45.97X, as low as 0.93X, and with a median of 10.37X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Equipment Stocks to Benefit
Oil States International, Inc: Oil States International is focused on maintaining capital and cost discipline, with a positive macro outlook supported by a growing project backlog, which is expected to drive increasing cash flows. The company, carrying a Zacks Rank of 2 (Buy), has a strong balance sheet since it has lower exposure to debt capital than composite stocks belonging to the industry.
Price and Consensus: OIS
Kodiak Gas Services: A well-known natural gas contract compression service provider, Kodiak Gas Services is well-poised to gain from increasing clean energy demand. The firm, carrying a Zacks Rank #2, is likely to see massive earnings growth of more than 195% this year.
Price and Consensus: KGS
PEDEVCO Corp: The company is poised for continued growth with the anticipated increase in production from new non-operated wells in the D-J Basin. PEDEVCO, carrying a Zacks Rank #3 (Hold), is concentrating its efforts on developing the Permian Basin, recognized as the most productive basin in the United States. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: PED
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