For immediate release
Chicago, IL – December 10, 2021 – Today, Zacks Equity Research discusses Oil & Gas – Equipment, including NOW Inc. DNOW, Exterran Corporation EXTN, and Superior Drilling Products, Inc. SDPI.
The rapid spread of new variants of the coronavirus has raised new concerns that a new lockdown could affect global demand for fuel. This has clouded the prospects for the Zacks Oil & Gas – Mechanical & Equipment industry, as companies in the industry generate cash flow by providing equipment and services to energy companies around the world.
However, with the deployment of coronavirus vaccines on a large scale and with initial research revealing that the latest variant of the virus will not be as deadly as the previous one, the overall business scenario is likely to gradually improve. Among the industry pioneers trying to survive the challenging business scenario are NOW, Exterran Corp Y Top Drilling Products.
About the industry
The Zacks Oil & Gas: Mechanics & Equipment industry comprises companies that provide the necessary oilfield equipment (production machinery, pumps, valves, and various other drilling devices such as rig components) to exploration and production companies. These help upstream energy players extract crude oil and natural gas from fields, both onshore and offshore. Therefore, the well-being of the oilfield equipment companies is positively correlated with the expenses of the upstream companies.
These companies receive bids from integrated energy companies and national and independent oil and gas companies. Oilfield equipment suppliers also engineer, manufacture, engineer, and install products that are used to treat and process crude oil, natural gas, and more. Its products also include apparatus and instruments used in gas compression packages and water treatment works.
What is shaping the future of the oil and gas equipment industry?
Upstream business uncertainty: The coronavirus pandemic continues to affect global demand for fuel, although vaccines are being rolled out on a large scale. With the omicron variant of COVID-19 spreading rapidly, the outlook for global fuel demand is still uncertain. Uncertainty in fuel demand is likely to hurt commodity production, which in turn will reduce demand for energy and industrial engineering solutions, products and equipment.
Conservative Capital Expenditure of Explorers: Oil and gas exploration and production companies face increased pressure from investors to focus on shareholder returns rather than production. This hampers the production of commodities, reducing demand for companies’ products and services, which include welding tools and equipment, drilling and completion equipment, and many others.
Lack of long-term contracts: Considering the nature of the business, many companies in the industry lack long-term contracts with their clients. In addition, since customers are not subject to any minimum purchase volume, the business model of oil and gas equipment suppliers is not immune to raw material price volatility. Therefore, companies that belong to the industry are not ensuring stable cash flows and are exposed to the business uncertainty induced by the coronavirus.
Absence of contracts with most providers: Companies in the Oil & Gas – Mechanics and Equipment industry rely heavily on a wide variety of manufacturers and suppliers to distribute products to customers. Companies have contracts with very few of their suppliers. Thus, companies are prone to the loss of any potential supplier, which will make it difficult to find other new suppliers on favorable terms. Therefore, there are enormous possibilities for adverse effects on product offerings and companies.
Zacks Industry Rank Indicates Grim Outlook
Zacks Oil and Gas – Mechanical and Equipment is a group of 11 stocks within the broader Zacks Oil – Energy sector. The industry currently has a Zacks Industry Rank # 167, which places it in the bottom 34% of more than 250 Zacks Industries.
The group’s Zacks industry rank, which is basically the average of the Zacks rank of all member stocks, indicates short-term bearish outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before presenting a few stocks you may want to buy, as these can navigate your way through the uncertainties, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry underperforms industry and S&P 500
The Zacks Oil & Gas – Mechanics & Equipment industry has underperformed the Zacks Oil & Power sector overall and the Zacks S&P 500 composite over the past year.
The industry is down 6% last year compared to the overall sector increase of 24.3%. The S&P 500 is up 28.4% in the same time period.
Current industry valuation
Since oilfield equipment suppliers are burdened with debt, it makes sense to value them based on EV / EBITDA (business value / earnings before interest tax depreciation and amortization). This is because the valuation metric takes into account not only 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 business value at EBITDA (EV / EBITDA) for the last 12 months, the industry is currently trading at 7.12X, lower than the 15.78X of the S&P 500. However, it is higher than the EV / EBITDA of the last 12 months of the 4.51X sector.
Over the past five years, the industry has traded as high as 48.04X, as low as 2.48X and with a median of 11.85X.
3 oil and gas equipment stocks trying to overcome industry challenges
NOW Inc: NOW generates significant cash flows by offering a complete line of products and solutions to energy companies around the world involved in upstream, midstream and downstream activities. With a legacy of operating history of more than 150 years, NOW supports both onshore and offshore activities in prolific oil and gas res that span the globe.
With no outstanding debt, NOW has a strong balance sheet. NOW’s stock, rated Zacks # 2 (Buy), has gained 20% so far this year, supported by its ability to navigate through business uncertainties. The Zacks Consensus Estimate for NOW’s current-year earnings per share indicates a 103.1% year-on-year increase.
Exterran Corporation: As the world’s leading provider of compression and natural gas treatment and processing products and services, Exterran is well positioned to generate significant cash flows. As of September 30, 2021, Exterran has a strong order book of $ 1.8 billion, guaranteeing additional profit.
Exterran has established a strategic focus on continuing to protect balance sheets while boosting cash flows from operations. Exterran, with a Zacks Rank of 2, has the skill set and knowledge necessary to participate in energy transitions. You can see Today’s full list of Zacks # 1 rank stocks here.
Superior Drilling Products Inc: As a leader in providing cost-saving solutions that will drive production efficiency for oil and gas drilling activities, Superior Drilling Products is well positioned to generate significant cash flows. Superior Drilling Products is committed to strong demand for fabrication and reconditioning tools and services.
With increasing market penetration, Superior Drilling Products generates more revenue from the international market. Additionally, competitive advantages are leading Zacks’ # 2 ranked action in generating significant revenue from North American activities.
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Past performance is not a guarantee of future results. Inherent in any investment is the potential for loss. This material is provided for informational purposes only and nothing contained herein constitutes legal, tax, accounting, or investment advice, or a recommendation to buy, sell, or hold a security. No recommendation or advice is given as to whether any investment is suitable for a particular investor. It should not be assumed that investments in identified and described securities, companies, sectors or markets were or will be profitable. All information is current as of the date of this document and is subject to change without prior 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 value. These returns come from hypothetical portfolios consisting of Zacks = 1 rank stocks that were rebalanced monthly with no transaction costs. These are not the returns from actual portfolios of stocks. The S&P 500 is an unmanaged index. Please visit https://www.zacks.com/performance for information on the performance figures shown in this press release.
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NOW Inc. (DNOW): Free Stock Analysis Report
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