Oil services evolves
Wednesday April 25, 3:17 pm ET
Drilling for oil is all about picking the right spot. In recent years, investors in oilfield services companies - which supply manpower and equipment to the oil majors - have not had to be too choosy about where they place their bets. That happy situation now may be coming to an end. As in any cyclical industry, valuation multiples have derated even as share prices have soared. Investors worry that new capacity will have a predictable effect on asset utilisation and pricing.
The unfolding first-quarter results season ought to lift their spirits, though. Industry leader Schlumberger (NYSE:SLB) reported its seventh straight record quarter last week. On Wednesday, Baker Hughes (NYSE:BHI) also beat expectations, albeit reduced ones following a weak fourth quarter in its North American business. America will remain a wildcard in the short-term, with gas prices being one volatile factor affecting demand for rigs.
More important in the longer term, however, is Baker's stronger showing abroad, where it raised guidance on sales growth. This reflects the reality of national oil companies (NOCs), particularly in the eastern hemisphere, controlling the bulk of global reserves. Halliburton (NYSE:HAL), which also reported results on Wednesday, has recognised this in deciding to shift its chief executive's office to Dubai.
Baker, Halliburton and Schlumberger, with their increasing focus outside America and the scale to serve the NOCs, are good bets. Drillers serving hard-to-reach areas such as deepwater fields, such as GlobalSantaFe (NYSE:GSF), also hold scarce assets. Two-thirds of floating rigs and drill ships being built are already contracted, mitigating the threat of new capacity in this sector.
The need to make oil fields work harder also favours specialists. EMGS, recently listed in Oslo, uses advanced technology to make the process of finding fields more accurate. That is valuable when the energy industry is stretched and must deploy resources carefully. Investors in oil services should now adopt the same approach.
