The easy oil has long since been discovered and produced. Future sources of oil are becoming increasingly more challenging to find and produce. That future is right in the sweet spot of National Oilwell Varco's (NYSE:NOV) business plan, which has it supplying the energy industry with the technology needed to access this hard-to-reach oil.
What everyone seems to be missing
That future seemed lost on investors, who sold off National Oilwell Varco's stock after it reported first-quarter results and forecast a slowdown in orders for offshore rig equipment. What these investors missed is that this market is still in the early stages of developing. The shale market, another source of income for the company, is even earlier in development. Needless to say, National Oilwell Varco has a lot of growth left.
CEO Clay Williams noted that the company's long-term outlook remains robust. National Oilwell Varco still sees four major trends driving its business prospects: the buildout of a fleet of deepwater rigs, the buildout of floating production systems to produce deepwater discoveries, the retooling and replacement of the industry's aging jackup fleet, and the continued growth of new technology to unlock shale plays.
On the conference call with analysts last week, Williams noted that oil production growth is going to come from deepwater and from shale -- delivering a great opportunity for the company. He also noted something interesting about the growth of these two key areas. Deepwater production has slowly grown from zero to 9% of the world's production over the past 20 years, while shale production has gone from zero to 3% over the past six years. However, these two oil sources only represent one out of every eight barrels of oil produced. With conventional sources of oil in a steady state of decline, deepwater and shale production will only grow in importance over the next decade, with National Oilwell Varco being the key supplier to the energy companies seeking and producing this oil.
The battle has just begun
In his opening remarks on the conference call, Williams repeatedly said oil companies are in a battle for the lowest-cost supply of oil. The company that can produce the commodity at the least expense earns the best profits. As deepwater and shale oil are more expensive to produce than other sources, he sees National Oilwell Varco in a unique position because it's one of the few companies that can supply the industry with the critical components needed to find success on the battlefield of cost. Williams said the industry needs the specialized tools his company builds: deepwater rigs, floating production systems, subsea production systems, and Tier 1 land rigs.
While competitors such as FMC Technologies (NYSE:FTI) and Cameron International (NYSE:CAM) compete against National Oilwell Varco in certain markets, such as subsea systems, neither has the product depth to challenge it across the industry. Furthermore, neither FMC nor Cameron has the size or scale to compete on cost the way National Oilwell Varco can.
Williams said his company is working to "transform the deepwater rig fabrication supply chain." He sees the company's experience working with shipyards uniquely positioning National Oilwell Varco to drive down both the expenses and risks of these complex projects. In fact, he thinks the fact that the deepwater industry is pausing due to rapidly increasing costs actually plays into the hands of National Oilwell Varco, which Williams said can be the "advocate to change" and "pioneer a better way."
These specialized tools will better enable oil companies to compete on costs in order to lower the marginal expense per barrel. That will translate into increased profits for exploration and production companies, as well as more profit for National Oilwell Varco. So while investors were fretting about the company's reduced outlook, that might be what's needed for the industry to see just how much money can be saved by working with National Oilwell Varco to provide a better solution to extract more oil from increasingly harder to reach places.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends FMC Technologies and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. 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.