This article is part of our Energy Investing series. Click back to the series introduction to learn more and access easy-to-follow links to the entire series.
The oil and gas industry presents plenty of ideas for investors in need. There are so many options that really, entire portfolios can be built to reflect the process of extracting commodities from the ground and turning them into an end product that people use every day. While I'm not suggesting you actually do that, I am suggesting taking a closer look at energy from start to finish and evaluating the best stocks for your portfolio.
Yesterday we tackled exploration and production. Today, let's move on to oil-field services companies. These guys are the experts that the E&Ps can't live without and can be a great addition to your portfolio.
State of the industry
Unlike the midstream industry, which I'll cover in the next installment, the oil-field services industry can be affected by the price volatility in commodities. Despite this, I remain bullish on the industry for one very important reason: Exploration and production companies rely heavily on oil-field services providers. This dependency will only increase as oil and gas become harder to find and harder still to produce. At some point -- and I'm not saying it will be tomorrow -- it won't matter if E&Ps don't want to spend money contracting out OSPs. They will have to in order to continue producing.
The evidence to support this theory can be seen quite clearly in North America. Here we have three "unconventional" markets that are booming: Canada's oil sands, shale oil, and shale gas. Technological advancements are the driving force behind this production, and OSPs are in high demand. In the case of the American shale plays, where producers are pulling back on gas production, many of the rigs are just moving to the oil plays, mitigating the effect of a slowdown for oil-field services providers.
Hot spots
Offshore Brazil, E&Ps are clamoring to develop the pre-salt fields that contain an estimated 50 billion barrels of oil. National Oilwell Varco (NYSE: NOV) is expected to be a big player here. The company provided the equipment for the last seven orders for Petrobras rigs, and analysts predict the company will fill the order Petrobras just placed for 28 additional rigs. A quick look to the future reveals that pre-salt discoveries offshore Angola mirror the Brazilian geology, and may yield yet another opportunity for oil-field services providers to cash in.
Drilling in ultracold, ultradeep water is also picking up. Norway's Statoil recently announced a partnership with Chevron to explore Canada's frigid Beaufort Sea. Look for this trend to pick up steam (figuratively), and the expertise of oil-field services providers to be needed.
And of course, there is the energy boom in North America. Though the rig count dropped slightly in the U.S. from January to February of this year, the 1,981 total is up 282 rigs from February 2011. Canada increased its February rig count to 701, up 19 from January.
Players
This sector is a big one, but a few key players definitely stand out. Besides National Oilwell Varco, fellow Fool David Meier's No. 2 energy stock, we have Schlumberger (NYSE: SLB), one of the Fool's Top 5 Energy picks this year, and a handful of others to consider as possible investments.
|
Company |
2011 Revenue |
Revenue Growth (YOY) |
Performance (YTD) |
|---|---|---|---|
| Halliburton (NYSE: HAL) | $24.8 B | 28% | 2.1% |
| National Oilwell Varco | $14.7 B | 18% | 14.8% |
| Schlumberger | $39.5 B | 31% | 8.2% |
|
C&J Energy Services
(NYSE: CJES) | $758 M | 68% | (8.0%) |
|
Baker Hughes
(NYSE: BHI) | $19.8 B | 27% | (4.4%) |
Source: Yahoo! Finance and YCharts. YOY = year over year. YTD = year to date.
The oil-field services business is a varied one, so here's the skinny on what the companies above do best.
Halliburton: Hydraulic fracturing. Halliburton is a big player in the U.S. shale gas scene, completing wells and running 24-hour fracking crews.
National Oilwell Varco: Equipment manufacturing. National Oilwell Varco recently reported absurdly high operating margins of 26% for its manufacturing sector!
Schlumberger: Global dominance, plain and simple. Schlumberger is the biggest OSP in the world. Technologically superior to competitors, Schlumberger is also the largest seismic imaging company -- crucial to deep-sea exploration and production.
C&J Energy Services: Hydraulic fracturing. C&J is incredibly active in the Texas shale plays and counts nearly all the biggest oil and gas producers in the region as its customers. Bonus? C&J has no debt to speak of.
Baker Hughes: General E&P services; also supports pipeline and refining operations. Baker Hughes has published industrywide rig counts for the past 60 years, keeping its finger on the pulse of the industry.
Drilling deeper
Chances are, there is an oil-field services company that's just right for your investing needs. Checking in with our CAPS community and utilizing the Fool's My Watchlist service are both great ways to do more research to narrow down the choices for your portfolio.
Fool analysts have dubbed one oil-field services company "The Only Energy Stock You'll Ever Need." Interested investors should click here to check out the free report.
