3 Potential Opportunities in the Oil & Gas Drilling Industry

Zacks04-25

Lately, the Zacks Oil and Gas - Drilling industry has faced setbacks due to the conclusion of their lucrative legacy contracts, uncertainties surrounding the slowdown in upstream capital spending ...

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Despite these macro challenges causing a slowdown in activity, we believe there are opportunities for growth-oriented operators focused on efficiency initiatives. Our watchlist for investors includes Saipem SpA SAPMF, Helmerich & Payne HP and Precision Drilling Corporation PDS.4 Trends Defining the Oil and Gas - Drilling Industry's Future. Low Replenishment of Reserves Point to Drilling Requirement: One of the key positive arguments for drillers is the focus on the reserve replacement rate. Over the past few years, the supermajors have struggled to replace all of the oil and gas they churn out, raising concerns about future production. In this context, Chevron’s 2023 reserve replacement ratio of 86% indicates","collect":0,"end_time":0,"defaultTopTitle":"yahoo.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"VOO":"Vanguard标普500ETF","SH":"标普500反向ETF","PDS":"Precision Drilling Corp","SDS":"两倍做空标普500ETF","IVV":"标普500指数ETF","SPXU":"三倍做空标普500ETF","BK4585":"ETF&股票定投概念","BK4534":"瑞士信贷持仓","OEF":"标普100指数ETF-iShares","SPY":"标普500ETF","UPRO":"三倍做多标普500ETF",".SPX":"S&P 500 Index","OEX":"标普100","BK4559":"巴菲特持仓","BK4588":"碎股","BK4550":"红杉资本持仓","BK4179":"石油天然气设备与服务","HP":"赫尔默里奇和佩恩材料","BK4581":"高盛持仓","BK4504":"桥水持仓","SSO":"两倍做多标普500ETF","SAPMF":"Saipem S.p.A.","BK4092":"石油与天然气钻井"},"translate_title":"油气钻探行业的3个潜在机遇","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SAPMF":1,"PDS":1,"HP":0.9,"VOO":0.7,"SPY":0.7,"IVV":0.6,"UPRO":0.6,"SSO":0.6,"SPXU":0.6,"SH":0.6,"SDS":0.6,"OEX":0.6,"OEF":0.6,".SPX":0.6,"ESmain":0.6},"content_text":"Lately, the Zacks Oil and Gas - Drilling industry has faced setbacks due to the conclusion of their lucrative legacy contracts, uncertainties surrounding the slowdown in upstream capital spending growth, and inflationary pressures. Despite these macro challenges causing a slowdown in activity, we believe there are opportunities for growth-oriented operators focused on efficiency initiatives. Our watchlist for investors includes Saipem SpA SAPMF, Helmerich & Payne HP and Precision Drilling Corporation PDS.\nIndustry Overview\nThe Zacks Oil and Gas - Drilling industry consists of companies that provide rigs (or specialized vehicles) on a contractual basis to explore and develop oil and gas. These operators offer drilling rigs (both land-based/onshore and offshore), equipment, services and manpower to exploration and production companies worldwide. Drilling for hydrocarbons is costly and technically difficult, and its future primarily depends on contracting activity and the total number of available rigs at a given time rather than the price of oil or gas. Within the industry, it's interesting to note that the volatility associated with offshore drilling companies is much higher than their onshore counterparts, and their share prices are more correlated to the price of oil. Overall, drilling stocks are among the most volatile in the entire equity market.\n4 Trends Defining the Oil and Gas - Drilling Industry's Future\nCapital Budget Constraint: Despite the rise in oil prices, upstream operators prioritize maintaining reduced spending, lowering breakeven costs and ensuring financial stability. While costs have been cut and completion activity is increasing, overcapacity and pricing pressures limit the benefits. Reduced drilling by customers affects demand for oilfield services, leaving the sentiment toward the industry uncertain and unclear.\nStep Up in Costs: Most energy companies (including drilling operators) have been experiencing rising costs in the form of increased expenses related to maintenance and inventory. Despite moderating from the record levels, U.S. inflation is still running above the Fed's target. This, together with supply-chain tightness, is not only pushing costs higher but also affecting the capital programs of the industry players. Apart from being hard to ignore, escalation in expenses is also drowning out the benefits of any commodity price increase. In our view, the inflation-associated headwinds will continue to challenge growth and margin numbers with little chance of a quick resolution. This may lead to a rough road for oil/gas equities engaged in drilling.\nLow Replenishment of Reserves Point to Drilling Requirement: One of the key positive arguments for drillers is the focus on the reserve replacement rate. Over the past few years, the supermajors have struggled to replace all of the oil and gas they churn out, raising concerns about future production. In this context, Chevron’s 2023 reserve replacement ratio of 86% indicates the inability to add proved reserves to the amount of oil and gas produced. This clearly calls for a calibrated approach to meeting reserve shortfalls in the long run. Consequently, a gradual improvement in drilling activity looks likely.\nDwindling Pool of Legacy, High-Margin Contracts: For most operators, order levels have remained depressed, and day rates are trending just above cash costs despite the strong rebound in commodity prices. This has put increased pressure on their revenue-generating capacity. Further, as the companies’ legacy, high-margin contracts wind down slowly, drillers are faced with the prospect of a drop in backlog (and consequently, revenues), which is likely to accelerate over the next few quarters. This also leaves drillers vulnerable to addressing their massive debt maturities and investment in newbuilds.\nZacks Industry Rank Indicates Bearish Outlook\nThe Zacks Oil and Gas - Drilling industry is a 12-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #159, which places it in the bottom 37% of more than 250 Zacks industries.\nThe group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.\nThe industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2024 have gone down 23.9% in the past year.\nDespite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.\nIndustry Underperforms Sector & S&P 500\nThe Zacks Oil and Gas - Drilling industry has fared worse than the broader Zacks Oil – Energy sector as well as the Zacks S&P 500 composite over the past year.\nThe industry has gone up 4.4% over this period compared with the broader sector’s increase of 9.1%. Meanwhile, the S&P 500 has gained 23.3%.\nOne-Year Price Performance\n\nIndustry's Current Valuation\nSince oil and gas drilling 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.\nOn the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 16.87X, higher than the S&P 500’s 14.66X. It is also well above the sector’s trailing 12-month EV/EBITDA of 3.05X.\nOver the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 13.65X, as the chart below shows.\nTrailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)\n\n\n3 Oil and Gas - Drilling Stocks to Watch\nSaipem: A global leader in the engineering and construction of major projects encompassing the energy space, Saipem is active both offshore and onshore through its sophisticated fleet of vessels. The company's focus on project delivery, execution and cash flow generation drives its robust margins. Further, Saipem’s strong backlog indicates increased revenue visibility in the future.\nThe Zacks Consensus Estimate for 2024 earnings of SAPMF indicates 60% growth. Over the past 60 days, this Italy-based firm saw the Zacks Consensus Estimate for 2024 move up 14.3%. The company has a market capitalization of $4.8 billion. Saipem stock, carrying a Zacks Rank #1 (Strong Buy), has surged 57.6% in a year.\nYou can see the complete list of today’s Zacks #1 Rank stocks here. \nPrice and Consensus: SAPMF\n\nHelmerich & Payne: Helmerich & Payne is engaged in the contract drilling of oil and gas wells in the United States & internationally. Its technologically advanced FlexRigs are much in demand. The Zacks Rank #3 (Hold) company has already upgraded most of its drilling fleet with the latest technology. Besides, Helmerich & Payne boasts a strong balance sheet, carrying little long-term debt. With available liquidity surpassing debt levels and no significant near-term maturities, Helmerich & Payne should sail through any difficult operating environment.\nTulsa, OK-based HP’s Value and Growth Score of A and B, respectively, helps it to round out with a VGM Score of B. The company beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. The Helmerich & Payne stock has gained 22.5% in a year.\nPrice and Consensus: HP\n\nPrecision Drilling: This #3 Ranked company is Canada’s largest drilling rig contractor. A provider of rentals, wellsite accommodations/catering and snubbing services, Calgary-headquartered Precision Drilling has active operations in the United States, Mexico and Saudi Arabia. In particular, PDS’ market-leading Alpha digital technology portfolio provides it with a competitive edge. A tight rig market, together with strength in the company’s activity levels, should result in higher dayrates and an improving contract book. Precision Drilling’s prudent cost management and technological leadership are its other growth drivers.\nCalgary-based PDS’ Value and Growth Score of A each helps it to round out with a VGM Score of A. The company beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. The Precision Drilling stock has increased 29.6% in a year.\nPrice and Consensus: PDS\n\nWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report\nSaipem (SAPMF) : Free Stock Analysis Report\nHelmerich & Payne, Inc. (HP) : Free Stock Analysis Report\nPrecision Drilling Corporation (PDS) : Free Stock Analysis Report\nTo read this article on Zacks.com click here.\nZacks Investment Research","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430048286"}