Earning profits the unconventional way
Aside from the depths of the great blue seas, tight oil and natural gas formations around North America have been a boon for upstream producers. And, until lately, the same could be said for land-based equipment and service companies. Halliburton Company (NYSE:HAL) and peers can thank supply outstripping demand for the recent slowdown.
Infrastructure and end users simply weren’t prepared for what hit them. As a result, the price of natural gas plummeted in the States and rig operators closed up shop around the country. Fortunately, that imbalance is on the mend and expectations for an increase in land rigs means that these companies should be back in business.
I believe Halliburton Company (NYSE:HAL) is sitting in the pole position due to its industry-leading experience with hydraulic fracturing. Its “Frac the Future” initiative offers producers a full suite of clean and efficient drilling equipment, coupled with the knowledge gained from operating in some of the trickiest formations drilled to date. This expertise has also been leveraged in the first unconventional wells in countries like Argentina, Australia, and the site of the next potential black gold and gas rush — China.
Looking for a double dip?
Investors might be able to look no further than National-Oilwell Varco, Inc. (NYSE:NOV). If this were the armed services, NOV would most certainly rank very highly in the Marine Corps due to its amphibious business model. You see, National Oilwell Varco (NYSE:NOV) provides equipment and services for drilling rigs both on land and at sea.
Thankfully for NOV, most of the offshore rig operators aren’t sporting a fresh rig set like Ensco. This means repairs and upgrades are likely, especially as drilling environments become incrementally harsher. Due to its integrated offerings, the company tends to lock up clients for life.
As for its foot soldiers, NOV experienced the same fate as Halliburton Company (NYSE:HAL) recently. The slowdown in land drilling put a temporary dent in its operations, but the inevitable return to “drill, baby, drill” is right around the corner in my opinion. After all, it is rarely wise to bet against Warren Buffett, who reported owning over 5.25 million shares in the fourth quarter of 2012.
Take your portfolio in for service
The bottom line here is that spending from the upstream segment will show the U.S. government what trickle-down economics is all about. In this case, exploration and production companies simply cannot grow at a pace suitable for investors without the help of the companies mentioned here and their peers. Now it’s up to you to choose which company fits your investment style and portfolio best.
The article A Lesson From Energy in Trickle-Down Economics originally appeared on Fool.com.
Taylor Muckerman owns shares of Halliburton and Ensco. The Motley Fool recommends Halliburton, National Oilwell Varco, and Seadrill. The Motley Fool owns shares of National Oilwell Varco, Seadrill, and Transocean.
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