Yahoo Finance Zacks Industry Outlook Highlights Helmerich & Payne, Nabors Industries and Precision Drilling
For Immediate Release
Chicago, IL – March 10, 2023 – Today, Zacks Equity Research discusses Helmerich & Payne HP, Nabors Industries NBR and Precision Drilling Corp. PDS.
Industry: Oil & Gas - Drilling
Link: https://www.zacks.com/commentary/2063364/3-oil-gas-drilling-stocks-to-make-it-through-macro-headwinds
The Zacks Oil and Gas - Drilling industry has lately been pegged back by the impending end to their legacy high-margin contracts, uncertainties related to slowing global economic growth and inflationary pressures. Although macro challenges are leading to some moderation in activity, we think the space still has fuel left in the tank, especially for the operators that target growth opportunities and operating efficiency initiatives. We advise investors to focus on Helmerich & Payne, Nabors Industries and Precision Drilling Corp.
Industry Overview
The 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, the drilling stocks are among the most volatile in the entire equity market.
3 Trends Defining the Oil and Gas - Drilling Industry's Future
Concerns About Economic Growth: Most energy companies (including the drilling operators) have been experiencing rising costs in the form of increased expenses related to maintenance and inventory. The inflationary environment, together with supply-chain tightness, is not only pushing costs higher but also affecting their capital programs.
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.
Finally, what this means is that the central banks will be persistent with their aggressive policy of raising rates to stem inflation. This may lead to a rough road for oil/gas equities. In particular, worries about weaker energy demand due to the threat of recession (spurred by rising interest rates and slowing consumer spending) might jeopardize the commodity’s ascent.
Rig Count on the Move: Oil and natural gas prices have rebounded sharply, revisiting their multi-year highs last year due to rising demand and geopolitical tensions surrounding the Russian invasion of Ukraine. Consequently, drilling activity has been picking up in North America, a region on which most drillers are highly dependent.
As a matter of fact, the rig count in early March was 995 compared with 867 a year ago, in sync with the relative stability in commodity prices. The number of active units in the international market has gained sharply too. The steady growth in rig count is an encouraging indicator of drilling activity.
Wind-Down 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 increasing pressure on their revenue-generating capacity. Further, as the companies’ legacy, high-margin contracts wind down slowly, the 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 the drillers vulnerable to addressing their massive debt maturities and investment in newbuilds.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas - Drilling industry is a 9-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #201, which places it in the bottom 20% 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 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.
The 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. While the industry’s earnings estimates for 2023 have gone down 20.3% so far this year, the same for 2024 have fallen 10.3% over the same timeframe.
Despite 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.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - Drilling industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 12.1% over this period compared with the broader sector’s increase of 4.7%. Meanwhile, the S&P 500 has lost 6%.
Industry's Current Valuation
Since 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.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 17.09X, higher than the S&P 500’s 12.07X. It is also well above the sector’s trailing-12-month EV/EBITDA of 3.02X.
Over the past five years, the industry has traded as high as 24.76X, as low as 7.28X, with a median of 12.39X.
3 Oil and Gas - Drilling Stocks to Watch
Helmerich & 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 company has already upgraded most of its drilling fleet with the latest technology.
Besides, Helmerich & Payne boasts a strong balance sheet, carrying just $543 million in long-term debt, with a low debt-to-capitalization of 16.5% compared with many of its peers that are hugely burdened with debts, accounting for around 50% of their total capital structure. With available liquidity surpassing debt levels and a lack of significant near-term maturities, Helmerich & Payne should sail through any difficult operating environment.
The fiscal 2023 Zacks Consensus Estimate for this Tulsa, OK-based company indicates 4,580% earnings per share growth over fiscal 2022. The provider of land and offshore rigs carries a Zacks Rank #3 (Hold) and its shares have edged up 3% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Nabors Industries: Nabors is one of the largest land-drilling contractors in the world, conducting oil, gas and geothermal land-drilling operations. NBR is well positioned with a sound mix of high-performance rigs and new rigs working in key shale plays like Bakken and Permian. Nabors’ initiatives to expand its geographic reach and diversify its operating assets beyond land rigs bode well for its Rig Technologies and Drilling Solutions segments. Tesco Corporation, Robotic Drilling Systems and PetroMar's buyout have boosted the drilling operations and technology of Nabors, adding to the company's earnings and shareholder value.
The 2023 Zacks Consensus Estimate for this Hamilton, Bermuda-based company indicates 149.6% earnings per share growth over 2022. NBR currently carries a Zacks Rank of 3. The stock has lost 5.7% in a year.
Precision 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.
The 2023 Zacks Consensus Estimate for PDS indicates 699.5% earnings per share growth over 2022. The company beat the Zacks Consensus Estimate for earnings twice in the trailing four quarters. Precision Drilling stock has lost 8.8% in a year.
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Nabors Industries Ltd. (NBR) : Free Stock Analysis Report
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