These 2 Companies Are Riding the Wave of Rising Oil and Gas Spending

The global oil and gas services market is huge, and when final figures are released for 2013 it is expected that this market will have hit a record $1.2 trillion, up 15.9% from 2012. What's more, this rate of growth is expected to continue throughout the next few years. ExxonMobil and Petroleo Brasileiro alone plan to undertake capex of $409 billion through 2016.

Of course, a rapidly expanding oil services industry is great news for the companies that work within the industry, like National Oilwell Varco (NYSE: NOV  ) and Cameron International (NYSE: CAM  ) . However, rising capex is becoming a huge problem for oil and gas majors like Chevron (NYSE: CVX  ) , which are struggling to cover expenditure with cash flow and justify rapidly rising costs to investors.

Trying to cut back
With that said, Chevron is actually planning on cutting its capex over the next few years after what it calls a "relative peak year for investments" during 2013. Chevron overspent during 2013, with cash flows from operations totaling only $35 billion, while it spent $42 billion on capital projects. For the most part this budget overrun was due to an additional $4 billion for major resource acquisitions not included in the original budget. Still, the company needs to rein in its spending.

Chevron plans to spend $40 billion on capital projects during 2014, most of which will be on upstream oil and gas exploration; at the same time it expects capex on vast Australian LNG projects to reach its inflection point, which will ultimately result in less spending and more cash generation.

Reaping the benefits
But while big oil is spending heavily on capital projects, oil service companies are reaping the benefits.

Cameron and National Oilwell Varco are the two oil service sector leaders, and they both just reported blowout full-year 2013 results and order backlogs. Cameron, for example, reported record revenues of $2.9 billion for the fourth quarter of 2013, up an impressive 21% from the same period last year. National Oilwell's results were not as impressive, but they were still strong. The company reported a 15% year-on-year rise in rig technology revenues, and a 30% rise in revenues from its distribution and transmission segment. However, earnings only ticked up 5% excluding charges. Nevertheless, the most impressive metrics are both National Oilwell's and Cameron's order backlogs.

Impressive backlogs
Both National Oilwell and Cameron exited 2013 with record order backlogs: Cameron's stood at $11.5 billion, up 34% from 2012 and 93% from 2011. Meanwhile, National Oilwell came out of 2013 with a capital equipment order backlog of $16.2 billion, up 37% from the end of 2012. These companies are also experiencing a demand for high-margin, high-tech equipment as oil and gas exploration is driven to ever more extreme environments. Cameron stands testament to this as the company reported sequential margin expansion across all of its businesses and divisions during the fourth quarter, and indeed throughout 2013.

Unfortunately, even though these were record results, National Oilwell notes that there are some headwinds facing the oil services market, most of which are coming from the North American land drilling market. Although this is nothing new, a quick search on Google for "slowdown in North American drilling" brings up many statements from drilling companies that have been reporting lower drilling volumes for some time now. Indeed, as early as the first quarter of last year Schlumberger warned investors that a slower than expected increase in drilling activity and weak pricing environment have led to an uncertain outlook for the North American market. And this trend was confirmed when the company reported fourth quarter results revealing that land drilling had slowed further in the North American market thanks to compressed natural gas prices. In fact, almost all of Schlumberger's growth in the region came from the Gulf of Mexico.

So, these North American headwinds have been around for a year or so now and, as of yet, neither National Oilwell nor Cameron have been significantly affected.

Foolish takeaway
To sum up, the oil & gas service industry has seen rapid growth over the past few years, and this is set to continue despite a slow-down in activity within the North American market.

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