3 Oil Equipment Stocks Poised to Outperform Despite Industry Headwinds

Increasing oil stockpiles are likely to drag down prices. This will hurt demand for drilling and production equipment as explorers and producers will be reluctant to produce more of the commodity, creating a challenging outlook for the Zacks Oil and Gas- Mechanical and Equipment industry.

Companies striving to navigate these industry challenges include Natural Gas Services Group, Inc. NGS, USA Compression Partners, LP USAC and Oil States International, Inc. OIS.

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, both onshore and offshore. Hence, the well-being of oilfield equipment businesses is positively 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 used to 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 Decline: The U.S. Energy Information Administration (“EIA”) expects the West Texas Intermediate Spot Average price for 2026 to be $53.42 per barrel, significantly lower than the $65.40 per barrel price for 2025. EIA cited rising oil inventories as the reason for lower crude prices. Thus, a softer pricing environment of the commodity is unlikely to provide incentives for more exploration and production activities, consequently leading to diminished demand for drilling and production equipment of companies in the industry.

Conservative Capital Spending by Upstream Players: Exploration and production companies are becoming more conservative in their capital expenditures for upstream operations. This shift is driven by shareholders who want these companies to prioritize returning capital over increasing spending on production. This trend is likely to diminish demand for drilling and production equipment.

Lower Yield Than Sector: The composite stocks belonging to the industry have consistently been generating lower dividend yield than the oil energy sector over the past five years. Thus, investors looking for a healthy dividend yield may avoid stocks belonging to the industry.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Oil and Gas - Mechanical and Equipment is an 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #168, which places it in the bottom 31% 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 dull 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 take a look at the industry’s recent stock market performance and valuation picture.

Industry Surpasses Sector & S&P 500

The Zacks Oil and Gas - Mechanical and Equipment industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.

The industry has soared 36.2% in the past year compared with the broader sector’s increase of 26.9% and the S&P 500’s 18.5% improvement.

One-Year Price Performance

Industry's Current Valuation

Since oilfield equipment providers are debt-laden, valuing them based on the EV/EBITDA (Enterprise Value/Earnings before Interest, Tax, Depreciation and Amortization) ratio makes sense. 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 enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 9.41X, lower than the S&P 500’s 17.58X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 6.37X.

Over the past five years, the industry has traded as high as 44.58X and as low as 3.38X, with a median of 10.58X.

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

3 Oil & Gas Equipment Stocks Trying to Survive the Industry Challenges

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 (Hold), benefit by renting out more of their compression machines. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: NGS

USA Compression Partners: USA Compression Partners is a renowned name in the natural gas compression business. It is well-positioned to benefit from rising demand for cleaner fuels and higher LNG export volumes. On its latest earnings call, USAC, carrying a Zacks Rank #2 (Buy), unveiled its plan to add most of its new equipment by year-end, setting the stage for further growth next year.

Price and Consensus: USAC

Oil States International: OIS has secured $435 million in orders — its biggest backlog in more than a decade — showing strong customer demand. It is winning more projects and has a solid backlog, with book-to-bill above 1, meaning future sales are building up. This gives Zacks #2 Ranked Oil States International solid visibility and stability for revenue growth.

Price and Consensus: OIS

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Natural Gas Services Group, Inc. (NGS): Free Stock Analysis Report
 
Oil States International, Inc. (OIS): Free Stock Analysis Report
 
USA Compression Partners, LP (USAC): Free Stock Analysis Report

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

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