Bet on 3 Solid Oilfield Services Stocks Despite Industry Headwinds

Lower oil prices are likely to hurt exploration and production (E&P) activities, potentially affecting demand for oilfield services. Also, conservative capital management by upstream players is making the outlook for the Zacks Oil and Gas- Field Services industry gloomy.

Among the companies in the industry that are likely to survive the business challenges are TechnipFMC FTI, Archrock Inc AROC, 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. Also, the firms 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. Furthermore, 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

Soft Oil Price to Hurt Oilfield Service Demand: The U.S. Energy Information Administration (“EIA”) projects the spot average price of West Texas Intermediate (WTI) for 2025 at $64.16 per barrel, lower than $76.6 in the last year. EIA projects the commodity price to plummet further to $47.77 per barrel in 2026. The declining crude prices, as expected by the EIA, will hurt E&P activities, which in turn will adversely impact demand for oilfield services, as oilfield service players assist upstream companies in effectively setting up oil and gas wells.

Lower Upstream Spending: Shareholders prefer E&P 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 21-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #140, which places it in the bottom 43% 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 Lags S&P 500 & Sector

The Zacks Oil and Gas – Field Services industry has lagged the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.

The industry has declined 5.5% over this period against the S&P 500’s rise of 20.5% and the broader sector’s 1.8% 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 6.68X compared with the S&P 500’s 18.65X and sector’s 5.11X.

Over the past five years, the industry has traded as high as 12.87X and as low as 1.60X, with a median of 8.11X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 Oilfield Services Stocks to Invest in

Archrock

Archrock is a well-known player in the natural gas compression business. AROC, currently carrying a Zacks Rank #2 (Buy), has already entered into long-term contracts with premium customers that will generate stable fee-based cash flows. Notably, AROC has a strong presence in almost all key oil and natural gas shale plays.

Price and Consensus: AROC

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 2, 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 #2, announced that they are very optimistic about increasing its subsea orders by more than $10 billion this year.

Price and Consensus: FTI

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TechnipFMC plc (FTI): Free Stock Analysis Report
 
Core Laboratories Inc. (CLB): Free Stock Analysis Report
 
Archrock, Inc. (AROC): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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