Rising oil production that may surpass the yearly demand growth of the commodity will probably drag down prices. This will hurt demand for drilling and production equipment as explorers and producers will be reluctant to produce more of the commodity, creating a challenging outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.
Companies striving to navigate these industry challenges include Natural Gas Services Group, Inc. NGS, Solaris Energy Infrastructure, Inc. SEI 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 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 Decline: The U.S. Energy Information Administration (“EIA”) is expecting the West Texas Intermediate Spot Average price for 2025 and 2026 at $61.81 per barrel and $55.24 per barrel, respectively. The prices are significantly lower than the $76.60 per barrel price for 2024. EIA cited the increasing production volumes of the commodity to overcome yearly crude oil demand growth as the reason for lower oil prices. Thus, a lower pricing environment of the commodity is unlikely to provide incentives for more exploration and production activities, consequently leading to diminished demand for drilling and production equipment of companies in the industry.
Conservative Capital Spending by Upstream Players: Exploration and production companies are becoming more conservative in their capital expenditures for upstream operations. This shift is driven by shareholders who want these companies to prioritize returning capital over increasing spending on production. This trend is likely to diminish demand for drilling and production equipment.
Lower Yield Than Sector: The composite stocks belonging to the industry have consistently been generating lower dividend yield than the oil energy sector over the past five years. Thus, investors looking for a healthy dividend yield may avoid stocks belonging to the industry.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Oil and Gas - Mechanical and Equipment is a 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #206, which places it in the bottom 16% 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 dull 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 Sector, Lags S&P 500
The Zacks Oil and Gas - Mechanical and Equipment 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 3.9% in the past year compared with the broader sector’s fall of 4.6% and the S&P 500’s 10.8% increase.
One-Year Price Performance
Industry's Current Valuation
Since oilfield equipment providers are debt-laden, valuing them based on the EV/EBITDA (Enterprise Value/Earnings before Interest Tax Depreciation and Amortization) ratio makes sense. 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 5.66X, lower than the S&P 500’s 16.39X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 4.59X.
Over the past five years, the industry has traded as high as 43.82X and as low as 1.11X, with a median of 10.37X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges
Natural Gas Services: The United States is sending more natural gas overseas as Liquefied Natural Gas (LNG). To do this, gas needs to travel through pipelines to coastal export terminals. This creates higher demand for Natural Gas Services’ compression equipment to push the gas through the pipelines. So, as more LNG is exported and more pipelines are built, companies like NGS, sporting a Zacks Rank #1 (Strong Buy), benefit by renting out more of their compression machines. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: NGS
Solaris Energy: Despite a dip in oil prices, Solaris Energy, carrying a Zacks Rank #3 (Hold), hasn't experienced any major decline in business. It anticipates stable activity through the early part of the second quarter, with its logistics systems, key to supporting drilling and fracking, still in strong demand. In the first quarter, system activity rose more than 25%, and its top-fill systems were nearly fully deployed. While some operators may reduce activity later in the year if oil prices remain soft, SEI's oil and gas logistics business has proven resilient, contributing to more stable and predictable income.
Price and Consensus: SEI
Oil States International: Oil States International, carrying a Zacks Rank 3, is getting a lot of new business from customers outside the United States, especially from companies working in deep ocean areas to extract oil and gas. In fact, it received more orders than it delivered this past quarter, 1.5 times more, which is a great sign. That means more activities and cash flow are lined up for the future.
Price and Consensus: OIS
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