Russia is fighting with Ukraine. China is feuding with Japan and Vietnam. Iraq is imploding. The common theme? Energy, be it oil or natural gas. This unfolding global mess belies the bigger issue that emerging economies need more power. And giant nations are fighting now to ensure they have it or have a seat at the table when it's needed.
Where does that leave investors? Well, North American drillers like Enerplus (NYSE:ERF) and industry suppliers like National Oilwell Varco (NYSE:NOV) look like they will be increasingly valuable businesses.
According to the International Energy Agency (IEA), energy poverty is a problem affecting 1.3 billion people, or about 18% of the world's population. However, the IEA notes that, "Modern energy services are crucial to human well-being and to a country's economic development." That's why countries like China, where incredible economic progress is being made, have voracious appetites for energy. This trend isn't going to slow down or go away, which will make energy even more precious.
That's one of the reasons why China is willing to roil Vietnam by drilling in waters that both nations claim. Tiny Vietnam doesn't stand a chance in a fight with China! But no drilling anywhere can take place without drilling equipment. And this gear is increasingly high-tech and complex.
That's where a company like National Oilwell Varco comes in. National Oilwell Varco makes drill rigs and pipes, among other things. And right now its rig business has an all-time high backlog of $16.35 billion. That's a year-over-year increase of roughly 30%. Clearly, as the world fights over access to increasingly hard to find oil, a key supplier like National Oilwell Varco is in prime position to benefit no matter who's winning the brawl.
But it gets better. That's because National Oilwell Varco is in the midst of a corporate makeover. The rig segment makes up about half of the company's business and had an operating profit of roughly 21% in the first quarter. The company is set to spin off a smaller distribution business with margins in the 5% range. That will make the rig business a bigger piece of the overall puzzle and thus push companywide margins higher.
Meanwhile, back in the Americas
While industry suppliers like National Oilwell Varco should do well, the same isn't necessarily true for drillers. That's because tensions can lead to broken deals, equipment sabotage, or worse. So companies like Enerplus, which only drills in North America, will be running a much safer businesses. Energy prices will clearly have an impact on the top and bottom line, but geopolitics not so much.
Enerplus is expecting to produce around 100,000 barrels of oil a day this year. That is projected to come from a mixture of oil (around 40% of production) and natural gas and natural gas liquids (60%). And all of it will come from either the United States (60% of production) or Canada (40%).
Enerplus' production is minuscule compared to global giants that produce billions of barrels of oil. However, the fact that every ounce of Enerplus' production is squeezed out of countries that are "safe" could make this bit player a great addition to your energy portfolio.
And Enerplus is looking to get even better. For example, it's examining putting less space between its wells. In its Fort Berthold field this effort could double the number of wells it can drill and lengthen its drilling program by as much as seven years. Efforts like this will make it easier for Enerplus to hit the 10% production growth target it's set for 2014 -- and extend that steady growth well out into the future.
A war is brewing... are you ready?
There's no question that access to adequate supplies of power will be a driving force in the future. You can see the battle lines being drawn today, particularly by giants like Russia and China. If you're looking for a way to benefit, consider avoiding the whole mess like Enerplus does. Or consider entering the arms race as a supplier, like National Oilwell Varco.