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What happened

Shares of NOW Inc. (NYSE:DNOW) surged ahead 15% in August. The largest reason for the big gain was the company's earnings results on August 3rd that handily beat expectations. 

So what

NOW Inc. has been on the front lines of the oil and gas industry's decline for quite some time. As a supplier and distributor of parts and equipment to producers and service providers, its sales have been a bit of a bellweather for the industry as a whole. Conversely, things like drilling activity have been a proxy for analysts looking to estimate NOW's revenue. So when the company surprised analysts by posting better top and bottom line results by considerable margins, shares of NOW surged.

It may not seem like much that the company beat expectations -- after all, NOW's net loss for the quarter was $0.40 per share. One thing to consider, though, is that NOW has not met analyst expectations for a year now, so there was some enthusiasm related to that turnaround. Part of the reason that it was able to beat expectations is that the company has been incorporating some recent acquisitions that have helped to offset revenue declines from the reduction in overall drilling activity. 

Now what

NOW isn't out of the woods yet. The company has cut costs considerably over the past couple years, but the oil and gas market have yet to pick back up again in earnest. When it does, NOW will be one of the first companies to reap the benefits because so many oil and gas producers have been putting off buying new equipment or replacing parts. NOW is also in the good position of having a strong balance sheet that will allow it to increase market share even more as other distressed equipment providers and distributors feel the pinch of this down market. Investors may not need to overreact to this price jump as missing the boat on NOW's stock because the real rebound in oil and gas hasn't happened yet. So investors should keep an eye on overall drilling activity to get an idea of when NOW's stock may be ready to jump in a big way. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.