It’s sometimes said that markets can turn on a dime. That seemed to have happened with the energy sector, which was the huge 2022 winner, but the Energy Select Sector SPDR Fund (NYSEARCA: XLE) is down 7.56% so far in 2023, lagging behind all other sectors. 

Within the broader energy sector, oilfield services and machinery and equipment makers are explorers and producers in the past month. 

There are a few things going on: Oil prices are down due to factors including a higher dollar and mixed signals about economic growth. In addition, according to the U.S. Energy Information Administration, biofuels are displacing petroleum-based distillate fuel oil consumption on the West Coast. The EIA said consumption of distillate fuel oil dropped to its lowest levels since 2003. 

Renewables Replacing Petroleum Diesel

According to the EIA, “The primary cause for the decline is the replacing of petroleum diesel with biofuels, namely renewable diesel, which has gained a larger market share of the region’s diesel pool as clean-fuel programs incentivize biofuels.”

The group also said that crude oil, gasoline and heating oil prices have all declined year-over-year as of June 14. 

Meanwhile, oilfield services company Baker Hughes Co. (NYSE: BKR), which releases data on industry-wide U.S. and Canadian rig counts every Friday, says the U.S. rig count is down by 53 since a year ago and down by 8 in just the past week. 

The oil industry is rapidly transforming due to factors including changes in regulation, customer behavior, technology acquisitions, market share protection, and financial restructurings. Oilfield services have grown into an industry that combines advanced technologies and digital modeling with old-fashioned dirty work in the field. 

Shifting Industry Landscape 

As the recent merger of Patterson UTI Energy Inc. (NASDAQ: PTEN) and NexTier Oilfield Solutions Inc. (NYSE: NEX) illustrates, the industry landscape is shifting. 

But the importance of oilfield services is growing as the drillers and explorers themselves are consolidating. For example, Chevron Corp. (NYSE: CVX) recently said it would acquire PDC Energy Inc. (NASDAQ: PDCE) to add to its oil-and-gas reserves. 

The deal comes as producers are slashing budgets, instead opting to boost shareholder payouts through dividends and share repurchases. Earlier this year, Chevron increased its quarterly dividend to $1.51 per share and announced a $75 billion share buyback program. MarketBeat’s Chevron dividend data show a 37-year history of dividend increases. 

Reducing Debt, Buying Back Shares

At the same time, oil services firms have been fortifying their financial positions by reducing debt loads and increasing share buybacks. Baker Hughes, Schlumberger (NYSE: SLB) and Halliburton Co. (NYSE: HAL) all increased their dividends within the past two years, and all have robust share buyback programs. 

While that’s great for shareholders, it has the effect of leaving less cash on hand to invest in new technologies. But for the moment, oilfield services companies have to toe the line between delivering what their clients want right now and developing solutions that may be needed in the future and which could drive revenue. 

Schlumberger, Halliburton and Baker Hughes, all S&P 500 components, are consolidating below previous highs from late 2022 or early 2023. 

Weatherford: Triple-Digit EPS Growth

Switzerland-based Weatherford International plc (NYSE: WFRD), which focuses on drilling technologies to maximize output, in addition to well construction and completion, is the leading stock within the oilfield services industry. The stock has advanced 19.15% year-to-date, although a recent cup-with-handle breakout broke down. Nonetheless, analysts expect the company’s earnings to grow by 439% this year, to $4.63 per share, driven by increased business internationally. 

In a highly fragmented industry that’s seeing the early signs of consolidation amidst an ever-changing landscape, how should investors handle these stocks?

Watch For Strong Earnings & Good Chart Action

It’s best not to try guessing what companies might be acquisition targets; instead, focus on a sound combination of revenue and earnings growth combined with price performance. Currently, Halliburton, Schlumberger, Baker Hughes, Weatherford and Patterson-UTI are all expected to grow earnings at double-or triple-digit rates this year, and all their charts are holding up fairly well. 

Of that group, Weatherford currently boasts the best combination of fundamental and technical strength, but before making any purchase, be sure a stock you’re eyeing is a good fit in terms of sector exposure and risk levels, given what else you’re currently holding.