One of the most prominent developments in the oil industry over the past several years has been the large-scale shift toward unconventional sources of supply. After several decades of intensive drilling, fields of so-called "easy oil" have largely been depleted.
That means that oil companies have to venture into much harder-to-reach places, such as U.S. shale fields, Canada's oil sands, and deepwater locations, in search of black gold. Just look at what the world's largest oil companies have been up to.
Not only have they ventured into U.S. tight oil and gas plays, but they've also embarked upon endeavors that have landed them in the deep waters off the coasts of Brazil and even in the harsh waters of the Arctic. Royal Dutch Shell has announced plans to drill for oil off the coast of Alaska, while ExxonMobil and Statoil (NYSE:EQNR) have discussed plans to explore for oil in the frigid Arctic waters near Russia.
As oil and gas companies continue to venture into these harder-to-reach oil and gas frontiers, the complexity of the drilling process will continue to rise. National Oilwell Varco (NYSE:NOV), as the single biggest supplier of rig equipment with a whopping 60% market share, is aptly positioned to capitalize on this trend.
Through decades of consolidation, the company has grown to become one of the most sought-after providers of rig equipment for the world's largest drillers. It enjoys a low-cost position as the world's dominant rig equipment supplier, with its equipment featured on 90% of rigs around the world.
Not only do oil and gas companies turn to National Oilwell for new rigs, but many of them also desperately need to upgrade their older rigs to drill more technically complex wells. This means a steady revenue stream for the company as customers keep coming back with requests for repair and maintenance.
Risks to consider
Still, as with any investment, National Oilwell isn't without its risks. One of the biggest is a sustained collapse in the price of oil. Since many of the company's customers operate in deepwater locations that have relatively high costs of production, they're more vulnerable to having their operations become unprofitable if the price of oil plunges. If oil falls below their costs of production, they'll have no incentive to keep drilling, and rig orders could collapse.
Another major risk is equipment failure, which could lead to major fines, as well as jeopardize the company's reputation. For instance, rig provider Transocean (NYSE:RIG) came under attack for its involvement in the 2010 Deepwater Horizon incident, in which a BP (NYSE:BP) well blew out, leading to a fire and subsequent explosion aboard the Deepwater Horizon rig that discharged nearly 5 million barrels of oil into the Gulf of Mexico.
Though the trial is ongoing, it illustrates the financial and reputational damage that can follow when a piece of equipment fails and leads to a major disaster. Suffice it to say that all parties involved, including BP, which operated the rig, Transocean, which built and staffed the rig, and Halliburton (NYSE:HAL), which was placed in charge of cementing and monitoring the well, have suffered a hit to their reputations as a result of their involvement in the oil spill.