National-Oilwell Varco, Inc. (NOV), Halliburton Company (HAL), Baker Hughes Incorporated (BHI): 3 Stable Energy Investments

Oil service companies are also attractive

While National Oilwell Varco mainly sells equipment, companies like Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI) provide support and services to the oil and gas industries. Halliburton is the larger of the two, with revenue of $28.5 billion and net income of $2.64 billion in 2012. Baker Hughes recorded $21.4 billion in revenue and net income of $1.3 billion in 2012.

Like I did for National Oilwell Varco above, I’ll calculate the ROIC for both companies to see how efficient they are at generating returns from reinvested profits. Here are the results:

Although both companies have seen their respective ROICs decline Halliburton Company (NYSE:HAL) is clearly the more operationally efficient of the two. One reason for the decline has been massive capital expenditures made by both companies over the past few years. Halliburton has spent a total of $8.6 billion on capex from 2010-2012, while Baker Hughes Incorporated (NYSE:BHI) has spent $6.8 billion. These investments likely haven’t fully paid off yet, resulting in depressed ROICs.

In terms of valuation neither company is as cheap as National Oilwell Varco. Halliburton Company (NYSE:HAL)’s enterprise value is nearly 19 times last years earnings, while Baker Hughes Incorporated (NYSE:BHI) sits at about 20 times last years earnings. However, margins for both companies are still well below the pre-recession highs, and with significant revenue growth since then both companies are more attractive than they appear.

The bottom line

The oil equipment and services companies are set to benefit from the continued increasing demand for oil around the world. National Oilwell Varco is my favorite of the bunch, selling at a low price which underestimates its prospects, but Halliburton Company (NYSE:HAL) and, to a lesser extent, Baker Hughes Incorporated (NYSE:BHI), look attractive as well. Short-term results may be volatile, but in the long-term all three companies are solid choices.

The article 3 Stable Energy Investments originally appeared on Fool.com and is written by Timothy Green.

Timothy Green owns shares of National Oilwell Varco. The Motley Fool recommends Halliburton and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco.

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