Whether it was static kill, top kill, or top hat, BP's
Remember the good old days when everyone used the price of oil to determine where the economy was headed? High demand from a booming economy led to high prices that threatened the sustainability of said booming economy. Low prices reflected anemic economic activity and were a source of hope as lower input costs would help stimulate activity.
Well, these days our economy could use all the help it can get, so where are oil prices today? We're currently looking at $81 for a barrel of oil, a historically high level, as you might gather from headlines shouting about Chevron's
While those numbers sound great (for Big Oil, at least), they are backward-looking. Investors want to know where we are going. Let's assume there is a correlation between oil prices and economic activity. Further, we'll work under the theory that if oil prices are expected to remain strong (economic recovery), oil companies will invest more to pull it out of the ground. Big Oil's profits come at the end of the oil pipeline, so let's move upstream a bit. We'll look at what a few suppliers to Big Oil are telling us about the road ahead.
What's shakin'?
CGG Veritas
In the latest earnings conference call, the company's management said that previous forecasts of a business recovery were rendered premature because of the spill in the Gulf of Mexico and a delay in development of Brazil's offshore fields. While there was still strong demand for seismic mapping, there are too many ships on the seas. This is great for the drillers, not so much for the mappers.
However, management expects the strong demand for the company's seismic equipment and data translation to continue through year's end, indicating the oil companies are still hiring somebody to map underground oil and gas reserves. Given the low cost of seismic mapping in relation to drilling, this indicates some confidence in oil demand going forward, but is hardly conclusive.
Can you dig it?
Looking at a company that is tied to the more capital-intensive side of drilling, we turn to National Oilwell Varco
The company's order backlog for rig technology, which offers us as much of a look into the future as we can hope for, has declined since the third quarter of 2008, when it was at $11.8 billion. This quarter, despite taking in $660 million in net new orders, the backlog slipped from $5.4 billion to $4.9 billion. For a division that had $8.1 billion in sales last year, this isn't an encouraging trend. It also doesn't speak to a strong conviction that oil prices will remain where they are.
Life's a gas
Chicago Bridge and Iron
The company's margins have benefited from the skew toward natural gas storage because these projects are less complicated and come with higher margins. This is about to change, however. According to management's comments on the latest conference call, they are expecting to sign the bulk of this year's new orders in the second half of the year. The expectation, though, is that it will be several jobs under $1 billion and any large jobs will be focused on LNG processing. There appear to be few major refinery projects on the horizon.
The future is down
From the forecasts offered by these three oil and gas equipment suppliers, it would appear that oil companies are as uncertain as everyone else about the sustainability of the current economic state. While they do seem to be spending on less capital-intensive projects, heavy investment has been delayed until a clearer picture of the future is available.
For investors, that means a cautious approach is probably prudent. If oil prices are expected to slump, it would hint at a prolonged sluggishness in the global economy. To position your portfolio for this, try focusing on companies paying strong, safe dividends and possessing strong brands which provide pricing power. McDonald's, McCormick & Co., and, perhaps ironically, Exxon come to mind as good places to start.
