Oil & Gas Equipment, Rental, and Royalty Shares Lag Behind on Wednesday

The oil & gas equipment & services sector declined by 0.6% on Wednesday, with Dawson Geophysical and Profrac Holding experiencing significant losses of 12.2% and 6.7%, respectively. The rental, leasing, & royalty sector also lagged, down by 0.5% with Research Frontiers and Voc Energy Trust falling by 3.9% and 1.4%, respectively.

The oil and gas drilling industry is grappling with significant challenges, as shifting market dynamics and broader macroeconomic uncertainty continue to weigh on the sector. Despite their crucial role in energy development, drillers are facing headwinds from contracting delays, soft gas prices, and broader macroeconomic uncertainty. The Zacks Oil and Gas - Drilling industry's Zacks Industry Rank, which measures industry performance relative to other Zacks industries, currently sits near the bottom, reflecting shrinking earnings estimates and lagging stock performance [1].

Offshore drillers face risks from premature rig reactivation, while land-based operators remain exposed to fragile gas economics. However, there is a glimmer of long-term promise in deepwater demand, which is quietly rebuilding due to large untapped reserves and major project approvals. Companies like Transocean Ltd. (RIG), Patterson-UTI Energy (PTEN), and Precision Drilling Corporation (PDS) are beginning to emerge from the pack, leveraging their scale, advanced capabilities, and strategic positioning to navigate near-term challenges and capitalize on long-term opportunities [1].

Market volatility, driven by geopolitical risks, fluctuating oil prices, and trade tensions, is creating hesitation in customer decision-making and slowing the pace of tenders and contract awards. This uncertainty makes near-term earnings visibility harder for drillers and could weigh on fleet utilization if the uncertainty persists [1].

Premature rig reactivation is a concern, particularly in deepwater and ultra-deepwater segments. If reactivation trends continue without adequate dayrate support, it could undermine pricing power and margin expansion just as the market begins to stabilize. Maintaining capital discipline is key, but smaller or financially weaker players may jump in early, increasing competitive pressure [1].

Despite near-term uncertainty, the deepwater drilling outlook appears increasingly resilient, with strong fundamentals such as large undeveloped reserves and production declines in shale. Third-party forecasts project deepwater investment to rise 40% by 2030, with most projects economical above $50 oil. Multiple FIDs across the Gulf of Mexico, Brazil, and Africa support this view [1].

Weak gas prices may delay shale activity, dampening momentum in U.S. shale plays. The risk is that upstream firms pull back on gas-directed drilling programs, delaying demand for high-spec rigs and completions equipment. For land drillers with material exposure to gas-weighted basins, this poses a near-term earnings and utilization risk [1].

The Zacks Oil and Gas - Drilling industry has fared worse than the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year. The industry has gone down 38.6% compared to the sector's increase of 2.1% and the S&P 500's gain of 9.1%. The industry's current valuation, based on the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, is 7.86X, significantly lower than the S&P 500's 16.87X but well above the sector's 4.88X [1].

Three notable stocks in the industry are Transocean (RIG), Patterson-UTI Energy (PTEN), and Precision Drilling Corporation (PDS). Transocean reported contract drilling revenues of $906 million in the first quarter of 2025, up 18.7% from the prior year. Patterson-UTI Energy's strategic acquisitions and advanced technologies have boosted its scale and service offerings. Precision Drilling, Canada's largest drilling rig contractor, continues to set high standards in safety and performance [1].

References
[1] https://finance.yahoo.com/news/oil-gas-drilling-struggling-3-122400758.html