These Earnings are a Telling Sign of the Oil Industry, and Here's How You Can Profit From It

Knowing what the oil services industry is up to is like having a crystal ball for the oil and gas industry. Schlumberger (SLB 0.17%), Halliburton (HAL 0.08%), and Baker Hughes (BHI), three titans of the oil services industry, are leading signs of what to expect in the future from the other parts of the value chain. Based on the recent earnings releases of these two companies, there are some very valuable trends to watch coming up for other players in the space. Let's take a deep look at earnings and see what it could mean for the rest of the industry. 

Beyond the numbers

Oil services companies had a fantastic 2013. Capital expenditures for exploration and production companies have been consistently breaking records, with total capital spending for last year ending just above $680 billion. It also appears that this trend will continue at least through 2014 despite the calls from Big Oil companies to trim their capital budgets. Barclays estimates total capital spending at a whopping $723 billion for the next year.

As promising as this sounds, not every dollar spent will translate to profits for oil services companies. A great example of this recently has been certain services in North America like pressure pumping. Over the past several quarters, Schlumberger, Halliburton, and Baker Hughes have all stated that the pressure pumping business has been oversupplied and several of them barely make a return on these assets right now. 

The yearly earnings made those kinds of discrepancies very clear. Nearly all of the gains in revenue for Halliburton came from the international side of the business, and Baker Hughes' strongest revenue growth came outside North America as well. This is surprising because Halliburton and Baker Hughes both derive about 50% of their total revenue from North America. Schlumberger, on the other hand, only generates 30% of its business from the continent, so it also explains why the company was able to outpace the other two in terms of profitability this past quarter.

According to management, this will continue to be one of the largest trends in the oil services market. Schlumberger CEO Paal Kibsgaard noted on the recent earings conference call that contract prices in North America are expected to decline even further in 2014, and that the largest growth markets right now are sub-Saharan Africa and Russia. Other executives offered similar takes on growth. In a recent Motley Fool interview, National Oilwell Varco (NOV -0.11%) CEO Pete Miller said the leading opportunities for his company are in the international markets like offshore Africa and the potential for the Arctic in Russia. 

What is an investor to do?
The increase in capital spending and the larger returns in the international markets point to two very distinct investing themes: Exploration and production in North America is becoming more efficient, and oil services with more international exposure will be better off over the next couple years or so. 

We have already started to see that first situation come to fruition in 2013. EOG Resources (EOG -1.35%), arguably the top shale driller in America, saw its return on capital employed increase from 9.4% to 11.4% between 2012 and 2013. This is mostly a result of the company building out the infrastructure necessary to monetize its wells, more efficient drilling practices such as drilling multiple wells on a single pad, and sourcing its own sand for hydraulic fracturing. EOG isn't the only company making these sorts of advancements, and continued efficiency will result in less money spent on operations and eventually stronger bottom lines. 

So when looking at oil services companies, investors really need to pay attention to who is looking to capture those high growth markets. Schlumberger is one of the big players on the international scene, but others are looking to jump into these markets in a deeper fashion. Halliburton has been increasing its footprint in the Middle East through investments in technology centers in Saudi Arabia, and niche services company Core Laboratories (CLB) anticipates significant amounts of work in the Middle East around enhancing production at mature fields over the next several years. National Oilwell Varco is a little different from other players that are are more focused on equipment manufacturing and distribution, but the company has distribution centers in 62 countries. This is a very valuable platform that allows the company to sell equipment and parts to just about anyone that wants it in every part of the globe.  

What a Fool believes
Having a solid grasp on what oil services companies are up to is extremely valuable information. Not only does help in making investment decisions in that particular space, but it also gives insight into the rest of the oil and gas production value chain. Both National Oilwell Varco and Core Labs have yet to report, but their performance will more than likely be predicated on these themes. If only we could get a crystal ball like this for other industries.