The oil and gas equipment and service industry has historically experienced significant volatility due to lower oil and gas prices.
Demand for oil and gas services and products depends primarily upon the level of activity in the oil and gas industry worldwide. High levels of drilling and well remediation activity generally drive demand for the products and services used to drill and remediate oil and gas wells.
High levels of oil and gas activity increase cash flow available for oil and gas companies, drilling contractors, oilfield service companies, and manufacturers of oil country tubular goods (OCTG) or pipe to invest in capital equipment.
Declines in prices or market expectations of falling prices negatively affect the business in oil and gas equipment and services.
Sustained periods of low oil prices typically result in reduced exploration and drilling because oil and gas companies’ capital expenditure budgets are subject to cash flow from such activities and are therefore sensitive to changes in energy prices.
Thus changes in commodity prices can have a dramatic effect on rig demand, and periods of low demand can cause excess rig supply and intensify competition in the industry, which often results in drilling rigs, particularly older and less technologically-advanced rigs, being idle for long periods of time.
In order to get a clear picture of the industry, I selected three big players in the oil and gas equipment and service industry including National-Oilwell Varco, Inc. (NYSE:NOV), Halliburton Company (NYSE:HAL), and Baker Hughes Incorporated (NYSE:BHI).
National Oilwell Varco
National-Oilwell Varco, Inc. (NYSE:NOV) supplies equipment which is used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry.
The firm supplies nearly all of the equipment needed for offshore and onshore drills. In the last three years the company has shown a tremendous performance due to an increase in oil rigs in the years 2011 and 2012, and this is the reason the company has managed to grow its revenues at a Compound Annual Growth Rate (CAGR) of 28.04%.
Despite tough competition, the company’s margins were slightly hurt last year, with a 17.7% operating margin and a 13% net margin respectively, but the company successfully raised its return on invested capital from 11.32% in 2011 to 11.83%in 2012, respectively. The company has recently raised debt to finance in its operations to meet the increasing demand.
Halliburton
Halliburton Company (NYSE:HAL) is a provider of services and products to the energy industry related to the exploration, development, and production of oil and natural gas.
Over the years, the company has been working on integrating its drilling services to fully optimize drilling performance while lowering costs. The company began by placing its drilling engineering applications under one roof, including fluids, bits, and directional drilling.
Over time, the firm has integrated its services into a single solution, which means that a customer could obtain substantially greater well performance and reduced levels of nonproductive time by standardizing on Halliburton Company (NYSE:HAL) rather than mixing services from multiple service providers. With the help of its integrated services, the company has been able to grow its revenues at a CAGR of 25.93% over a three-year period. Though intense competition forced the company to cut its margins, resulting in a drop of 4.50% in operating margin to 14.6% in 2012, and a 2.19% drop in net margin, to 9.24%.
Baker Hughes
Baker Hughes Incorporated (NYSE:BHI) operates in the oilfield services industry. It provides products and services for drilling, completion, and production of oil and gas wells, fluids and chemicals, and reservoir technology.
Over the years, the company organized itself by product lines, which led to missed opportunities internationally, as national oil companies wanted a more holistic sales approach that focused on a suite of services.This is the reason the company’s revenue growth compared to its peer group is lower, at a CAGR of 21.74%. Operating and net margins were also lower than its peers, which are10.3 percent and 6.14 percent in 2012 respectively, also hurt by strong competition from its peer group.
Conclusion
According to the World’s Oil report, 2013 will be another good year with sustained E&P activity, despite a slight drop in WTI and Brent oil prices.
World Oil predicts that the Henry Hub price for natural gas will average $3.45/Mcf in 2013 and drilling has remained strong in the US and worldwide. Given these factors and others, World Oil’s forecast indicates that US drilling will rise 5.2% during 2013, to 47,053 wells, US footage drilled will rise 6.5 %, to more than 385 million feet of hole, and Gulf of Mexico drilling will recover toward a level not seen since before the Deepwater Horizon spill in 2010.
The restriction on supply by OPEC, political instability in North Africa and an embargo on Iran shifting the demand for oil and gas towards the U.S., will also translate into higher demand for oil and gas equipment and services companies. Currently, oil prices are on a rising trend, which provides strong growth potential for the company in coming years.
Among the above-mentioned companies, National-Oilwell Varco, Inc. (NYSE:NOV) would be the best choice, as it has a strong financial position to compete with its peers in local as well as international markets. Keeping these factors in view, I propose a bullish stance for this stock.
Hussain Asghar has no position in any stocks mentioned. The Motley Fool recommends Halliburton and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Hussain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Drilling Remains Strong in the USA originally appeared on Fool.com is written by Hussain Asghar.
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