3 Oil & Gas Equipment Stocks Set to Gain From Solid Industry Prospects

Oil price, which is still handsome, is driving the exploration and production activities, and will continue to boost demand for drilling and production equipment. In fact, the companies belonging to the industry have been witnessing rising backlog, reflecting a promising outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.

Investors remain optimistic about the sector's inorganic growth strategies and focus on reducing Scope 1 and 2 emissions. With strong balance sheets and minimal debt, many companies offer resilience against market volatility. Key players include NOV Inc. NOV, Oil States International Inc. OIS and Natural Gas Services Group, Inc. NGS.

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 onshore and offshore. Hence, the well-being of oilfield equipment businesses is 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 that 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 Remain Handsome: Per the U.S. Energy Information Administration (“EIA”), the average spot price of West Texas Intermediate (WTI) crude will likely be $65.15 per barrel in 2025, a pretty handsome price for exploration and production activities. This reflects a strong demand for equipment and services of the companies belonging to the industry.

Huge Backlogs: Companies belonging to the industry have massive backlogs, reflecting the fact that a huge line of customers is waiting for the companies’ equipment. Thus, the industry’s players are winning more high-value projects, securing incremental cash flows.

Reduction in Scope 1 and 2 Emissions: Oil and gas equipment companies are implementing decarbonization initiatives to reduce Scope 1 and 2 emissions, aligning with global sustainability goals. These measures not only contribute to mitigating global warming but also position these companies favorably within the increasingly environmentally conscious market. By adopting advanced technologies and operational efficiencies, these firms are not only addressing regulatory pressures but also boosting their long-term sustainability and attractiveness to investors focused on Environmental, Social and Governance criteria.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Oil and Gas - Mechanical and Equipment is a 10-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #20, which places it in the top 8% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bullish 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 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 risen 13.5% in the past year, surpassing the broader sector’s improvement of 5.8% but lagging the S&P 500’s growth of 17.7%.

One-Year Price Performance

Industry's Current Valuation

Since oilfield equipment providers 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.

Based on the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 7.32X, lower than the S&P 500’s 18.31X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 5.47X.

Over the past five years, the industry has traded as high as 44.10X, as low as 2.25X, and with a median of 10.46X.

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

3 Oil & Gas Equipment Stocks to Gain

NOV: NOV provides a variety of products and services to its customers to improve well performance and production. The company has a robust backlog of $4.56 billion, reflecting strong future cash flow generation. NOV, carrying a Zacks Rank of 3 (Hold), also has a strong focus on structural cost reduction initiatives.

Price and Consensus: NOV

Oil States International: Oil States International’s strategy is working well, thanks to its strong focus on more profitable offshore and international projects. OIS’ outlook is also being backed by an increasing backlog. The company, carrying a Zacks Rank #3, has a strong balance sheet, on which it can rely to sail through when the business environment turns unfavorable.

Price and Consensus: OIS

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, carrying a Zacks Rank #3, benefit by renting out more of their compression machines. You can see the complete list of today’s Zacks #1 Rank stocks here. .

Price and Consensus: NGS

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NOV Inc. (NOV): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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