3 Oilfield Services Stocks Poised to Gain Despite Industry Challenges
Higher exposure to debt capital compared to composite stocks belonging to the energy sector could hurt operations during an unfavorable business environment. Also, conservative capital management by upstream players is making the outlook for the Zacks Oil and Gas- Field Services industry gloomy.
The companies in the industry that are likely to survive the business challenges include TechnipFMC FTI, Oceaneering International, Inc. OII and Core Laboratories CLB.
About the Industry
The Zacks Oil and Gas – Field Services industry comprises companies that primarily provide support services to exploration and production players. These companies help in manufacturing, repairing and maintaining wells, drilling equipment, leasing of drilling rigs, seismic testing and transport and directional solutions, among others. The firms also help upstream energy players locate oil and natural gas and drill and evaluate hydrocarbon wells. Hence, oilfield services businesses are positively correlated to expenditures from upstream firms. With countries worldwide investing heavily in liquefied natural gas (LNG) terminals, a few oilfield service companies are extending their reach beyond the hydrocarbon fields and capitalizing on contracts for manufacturing equipment used in LNG facilities to decrease carbon emissions.
3 Trends Defining the Oilfield Services Industry’s Future
Higher Debt Exposure Than the Oil-Energy Sector: The total debt-to-capitalization of the industry is 43.1%, higher than the oil-energy sector’s 36.4%. This indicates that the companies belonging to the industry are exposed to relatively higher debt capital, which could make it difficult to continue their operations smoothly when the business environment turns unfavorable.
Lower Upstream Spending: Shareholders prefer exploration and production companies to return capital to them instead of spending money on producing more of the commodities. Thus, lower spending for E&P operations will directly hurt oilfield service demand.
Rising Renewable Energy Demand: The world is gradually preferring cleaner energy and renewable fuel. Thus, with the gradual decline in long-term demand for traditional fossil fuels like crude oil, the need for oilfield service companies will likely diminish.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Field Services is a 19-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #153, which places it in the bottom 38% 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 gloomy 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 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 – Field Services industry has surpassed the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.
The industry has jumped 53.3% over this period, outpacing the S&P 500’s rise of 21.7% and the broader sector’s 31.6% growth.
One-Year Price Performance
Industry’s Current Valuation
Since oil and gas 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 EV/EBITDA, the industry is currently trading at 9.35X compared with the S&P 500’s 17.83X and the sector’s 5.88X.
Over the past five years, the industry has traded as high as 13.78X and as low as 5.91X, with a median of 7.93X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oilfield Services Stocks to Gain
Oceaneering International
Oceaneering International is a leading provider of specialized equipment and services that help energy companies operate offshore. The demand for services is likely to remain strong, as the high crude price environment will continue to support exploration and production operations. Also, OII, currently carrying a Zacks Rank #2 (Buy), had $445 million of backlog at June-end and already secured multiple awards early in the third quarter. Based on its sales pipeline, management expects additional awards and an improvement in backlog during the second half of 2026.
Price and Consensus: OII
Core Laboratories
Core Laboratories is known for providing proprietary services to its customers, enabling them to gain a detailed understanding of underground rocks and extract oil from them. While prioritizing returning capital to shareholders, CLB, with a Zacks Rank of 3 (Hold), is also aiming to get the maximum out of invested capital. You can see the complete list of today’s Zacks #1 Rank(Strong Buy) stocks here.
Price and Consensus: CLB
TechnipFMC
TechnipFMC is a leading energy company that provides services and technology to help its clients improve the economics of their projects, enabling them to complete developments more efficiently. TechnipFMC, carrying a Zacks Rank #3, announced that its backlog is $16.4 billion, reflecting potential for future cash flows.
Price and Consensus: FTI
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This article originally published on Zacks Investment Research (zacks.com).