Oil Is Getting Harder to Find, and for Some This Is a Good Thing

Chevron is trying to grapple with rising oil exploration costs, but this is great news for Seadrill, National Oilwell Varco, and Cameron International.

Mar 2, 2014 at 1:00PM

Thanks to megaprojects like Chevron's (NYSE:CVX) $54 billion Gorgon LNG plant or ConocoPhillips' $25 billion Australia Pacific LNG plant, the cash flows of oil majors have come under pressure in recent years. As a direct result, 2013 may have been the industry's worst year for oil exploration since 1995. This trend has been confirmed by recent data from Seadrill (NYSE:SDRL) but, perhaps surprisingly, oil service companies like National Oilwell Varco (NYSE:NOV) and Cameron International (NYSE:CAM) are set to benefit.

Mega-projects take time
Chevron has a number of huge projects coming on-line in the near future, but the size of these projects is holding back growth in other regions. In particular, the four largest developments include the Gorgon and Wheatstone liquefied natural gas developments in Australia, and the Jack/St Malo and Big Foot deepwater oilfields in the Gulf of Mexico. In total, these projects will add 500,000 barrels per day to Chevron's existing production.

These megaprojects and the way they have been handled are a hot topic for discussion within the oil industry at present. Chevron's Gorgon LNG project, a joint venture with ExxonMobil and Royal Dutch Shell has seen costs spiral from an initial estimate of $37 billion, projected back in September 2009, to a current figure of $52 billion. This overrun is part of the reason why Chevron's 2013 capital spending budget has overrun initial estimates by around 10%.

Oil is getting harder to find
But it's not just these megaprojects putting a strain on cash flows. According to Seadrill, one of the world's largest offshore drilling companies, the oil industry is slowing exploration due to the rapidly rising cost. You don't have to look hard to find evidence to support this conclusion.

Since 2005, 314 new drilling units have entered the market at a cost of $114 billion, increasing the size of the global drilling fleet by 53%. Over the same period the production of oil offshore has declined from 24 million barrels per day, to 22.5 million. Norway in particular has seen its oil production fall by 18% over the period but the number of rigs operating has nearly tripled. In part, this rise in costs has been due to the higher specification of equipment required for drilling, described in this quote from Seadrill's full-year 2013 earnings release:

The oil companies' new requirements after Macondo and the focus on increased water depth areas has significantly limited the use of older equipment...Looking at the market as a whole, the acute challenges lie with fourth and fifth generation assets. The owners will face the choice of investing several hundred million dollars into twenty or thirty year old assets in order to try to meet the new demands or simply just lay up the unit.

Seadrill is well placed for this as 94% of the companies floater fleet is sixth generation and high-specification. The company has also noted increasing inquiries for sixth generation units only with no exceptions.

For some, rising costs are a good thing
So, it is easy to see how the cost of extracting oil is growing, although this is playing straight into the hands of oil service equipment producers. When final figures are released for 2013 it is expected that the size of the oil services market will have hit a record $1.2 trillion, up 15.9% from 2012; great news for the companies that work within the industry, like National Oilwell Varco and Cameron International.

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 has been significantly affected.

Foolish takeaway
Oil is getting more expensive to find and extract. While this is a problem for oil majors, it could be great news for oil services companies, which are riding a wave of surging capital expenditure in the sector.

Take advantage of surging oil and gas spending
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron, National Oilwell Varco, and Seadrill. The Motley Fool owns shares of National Oilwell Varco and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information