VAL, PTEN, RIG: 3 Oil & Gas Drilling Stocks Holding Promise

The Zacks Oil and Gas - Drilling industry faces a mixed outlook, with domestic challenges and international opportunities shaping its future. U.S. rig counts have declined by 18% over the past year, limiting drilling activity and dampening revenue prospects for service providers. Excess capacity and pricing pressures further constrain profit margins, intensifying competition in an already challenging market. However, international demand provides a silver lining. Strong global activity, reflected in increased rig awards and tendering, highlights the sector's growth potential. Meanwhile, Saudi Arabia's decision to freeze capacity expansion signals a cautious stance, dampening optimism for Middle Eastern projects. Despite these challenges, select companies like Valaris Limited VAL, Patterson-UTI Energy PTEN and Transocean Ltd. RIG stand out for their ability to navigate these dynamics.Industry OverviewThe 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.4 Trends Defining the Oil and Gas - Drilling Industry's FutureU.S. Rig Count Slump Signals Challenges: The U.S. oil and natural gas rig count has fallen by roughly 18% over the past year, reversing gains seen after the pandemic recovery. This steady decline has dampened drilling activity, a key revenue driver for service companies. With the sector heavily dependent on U.S. operations, the reduced rig count raises concerns about future contracts and overall operational performance.Excess Capacity Squeezes Profit Margins: Excess capacity and intense pricing competition create significant hurdles for oil and gas drillers. Even with a focus on pricing discipline, oversupply in the industry limits revenue growth. The resulting pricing pressures erode profit margins, challenging companies' ability to stay profitable. Lower drilling activity further compounds these difficulties, straining financial performance in an already competitive market.Global Demand Fuels Revenue Expansion: Oil and gas drilling firms are experiencing a significant uptick in international activity, reflecting the strongest demand levels in over a decade. This surge is bolstered by rising tendering and rig awards, indicating the sustained global need for drilling services. The growth in international operations is set to play a pivotal role in boosting revenues and ensuring long-term sector stability.Saudi Strategy Dampens Drilling Prospects: Saudi Arabia’s choice to freeze its Maximum Sustainable Capacity at 12 million barrels per day and halt expansion plans to 13 million bbl/day by 2027 has impacted the oil drilling sector. This decision signals a potential end to the Middle East’s capex surge, raising concerns for oilfield service stocks and casting doubts on future revenue opportunities from Saudi-led initiatives.Zacks Industry Rank Indicates Bearish OutlookThe Zacks Oil and Gas - Drilling industry is a nine-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #225, which places it in the bottom 9% of 248 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. As a matter of fact, the industry’s earnings estimates for 2025 have gone down 57.1% in the past year.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 Underperforms Sector & S&P 500The 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.The industry has gone down 29% over this period compared with the broader sector’s increase of 5.6%. Meanwhile, the S&P 500 has gained 27%.One-Year Price Performance Industry's Current ValuationSince 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 7.52X, significantly lower than the S&P 500’s 18.36X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 3.47X.Over the past five years, the industry has traded as high as 24.81X, as low as 7.16X, with a median of 14.66X, as the chart below shows.Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)3 Oil and Gas - Drilling Stocks to WatchValaris Limited: Valaris possesses a varied fleet of rigs, including ultra-deepwater drillships, versatile semisubmersibles, and modern shallow-water jackups. With the industry's largest and highest specification fleet covering both floaters and jackups, Valaris maintains a significant presence in key offshore basins, fostering deep customer relationships. The company's robust balance sheet ensures flexibility in capital allocation.The Zacks Consensus Estimate for 2025 earnings of VAL indicates 16.7% growth. Based in Hamilton, the company has a four-quarter earnings surprise of 43.5%. The company has a market capitalization of $3.2 billion. The Valaris stock, carrying a Zacks Rank #3 (Hold), has lost 33.7% in a year. You can see the complete list of today’s Zacks #1 Rank stocks here. Price and Consensus: VALTransocean: This #3 Ranked company provides rigs on a contractual basis to explore and develop oil and gas. Transocean offers offshore drilling rigs, equipment, services and manpower (with particular emphasis on ultra-deepwater and harsh environment drilling services) to exploration and production companies worldwide. Transocean's fleet is considered one of the most modern and versatile in the world due to its emphasis on technically demanding segments of the offshore drilling business.The firm has a market capitalization of $3.3 billion. Transocean, having beaten the Zacks Consensus Estimate for earnings in three of the last four quarters, has a trailing four-quarter earnings surprise of roughly 37.1%, on average. The RIG stock has decreased 34.5% in a year.Price and Consensus: RIGPatterson-UTI Energy: Patterson-UTI Energy's business is set to benefit from its proprietary design and technologically advanced ‘Apex’ rigs that can move faster than conventional rigs, drill quicker and are better suited to new-age drilling. Meanwhile, the company's strategic acquisitions of Ulterra and NexTier Oilfield Solutions have boosted its scale, service offerings and geographic presence. The company is also set to benefit from its investment in advanced technologies and robust free cash flow generating ability.PTEN beat the Zacks Consensus Estimate for earnings in two of the last four quarters. This Houston, TX-based firm has a Value and Growth score of A and B, respectively. The #3 Ranked company has a market capitalization of $3.2 billion. Nabors Industries stock has lost 16.4% in a year. Price and Consensus: PTENResearch Chief Names "Single Best Pick to Double"From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.Free: See Our Top Stock And 4 Runners UpWant 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 Valaris Limited (VAL): Free Stock Analysis Report Transocean Ltd. (RIG): Free Stock Analysis Report Patterson-UTI Energy, Inc. (PTEN): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks