The Zacks Oil and Gas - Drilling industry operates in a volatile environment, influenced by rig availability, contracting activity, and capital expenditures rather than commodity prices alone. A 5% decline in the U.S. rig count over the past year has slowed drilling momentum, raising concerns for domestic service providers. Meanwhile, offshore drilling demand remains strong, with high utilization rates and multi-year contracts supporting revenue stability. However, short-term imbalances in the Gulf of Mexico and Africa, coupled with regulatory uncertainties, could pressure day rates and delay new projects. Rising operational costs and shifting energy policies also add complexity. Despite these challenges, Patterson-UTI Energy PTEN , Transocean RIG and Helmerich & Payne HP are well-equipped to withstand industry pressures and leverage emerging growth opportunities.

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 natural 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, oil and gas drilling stocks are among the most volatile in the entire equity market.

4 Trends Defining the Oil and Gas - Drilling Industry's Future

U.S. Rig Decline Raises Industry Concerns: The U.S. oil and natural gas rig count has dropped approximately 5% over the past year, reversing the post-pandemic recovery momentum. This decline has slowed drilling activity, a crucial revenue driver for oilfield service companies. With a heavy reliance on U.S. operations, the industry faces potential contract reductions and weaker operational performance, raising concerns about sustained growth in the domestic market.

Strong Demand and Rising Day Rates in the Offshore Space: The oil and gas drilling industry is benefiting from a sustained upcycle, with rising global demand for hydrocarbons driving increased offshore drilling activity. Companies are seeing near-full fleet utilization through 2025, with demand extending into 2026 and 2027. Deepwater capital expenditures are projected to more than double by 2026, reflecting confidence in the sector’s long-term viability. Additionally, multi-year contract awards at high day rates demonstrate the industry's pricing power and revenue visibility.

Short-Term Imbalances Pose Risks: While offshore demand remains strong, the industry faces short-term risks from supply-demand imbalances as rigs roll off contracts before new projects commence. Temporary excess capacity in certain regions, such as Africa and the U.S. Gulf, could pressure day rates and contract renewals. Furthermore, economic uncertainties and potential regulatory shifts may impact project approvals, leading to delays in offshore developments. If capital investment slows, companies relying on sustained high utilization could face revenue headwinds.

Market Volatility and Cost Pressures: The oil and gas drilling industry faces challenges from volatile commodity prices and rising operational costs. Reduced capital expenditures from exploration and production (E&P) companies amid uncertain pricing can limit drilling activity. Additionally, regulatory scrutiny and environmental concerns over carbon emissions create long-term uncertainties, with growing competition from renewable energy sources posing a threat to industry expansion.

Zacks Industry Rank Indicates Bearish Outlook

The 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 #234, which places it in the bottom 5% of 247 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 68.1% 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 500

The 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 45.2% over this period compared with the broader sector’s decrease of 1%. Meanwhile, the S&P 500 has gained 9%.

One-Year Price Performance

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 8.19X, significantly lower than the S&P 500’s 16.74X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 4.77X.

Over the past five years, the industry has traded as high as 24.81X, as low as 7.16X, with a median of 14.54X, 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 Watch

Patterson-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.

Notably, over the past 60 days, the Zacks Consensus Estimate for PTEN’s 2025 earnings has moved up 66.7%. This Houston, TX-based firm has a Value and Growth score of A each. The Zacks Rank #3 (Hold) company has a market capitalization of $3.2 billion. Patterson-UTI stock has lost 27.6% in a year. 

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: PTEN

Transocean: 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 $2.8 billion. The Zacks Consensus Estimate for 2025 earnings for Transocean indicates 146.2% growth. The RIG stock has decreased 47.4% in a year.

Price and Consensus: RIG

Helmerich & Payne: Helmerich & Payne is a leading drilling contractor with a modern and efficient fleet, offering services in both North America and international markets. Its recent acquisition of KCA Deutag has significantly expanded its footprint, particularly in the Middle East, providing access to stable, growing markets. Helmerich & Payne’s advanced FlexRigs allow for higher efficiency, contributing to strong margins and utilization. The company has shown strong cash flow generation and continues to prioritize shareholder returns with a consistent dividend.

HP beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in the other. It has a trailing four-quarter earnings surprise of roughly 4.9%, on average. Additionally, the Zacks Consensus Estimate for Helmerich & Payne’s fiscal 2025 earnings has moved up from $2.93 per share to $2.98 in the past 30 days. The company has a market capitalization of $2.5 billion. HP, carrying a Zacks Rank of 3, has lost 38.5% in a year.

Price and Consensus: HP

Want 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

Patterson-UTI Energy, Inc. (PTEN) : Free Stock Analysis Report

Transocean Ltd. (RIG) : Free Stock Analysis Report

Helmerich & Payne, Inc. (HP) : Free Stock Analysis Report

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

Zacks Investment Research