In the current economic environment it is becoming more difficult for analysts to identify desirable investment opportunities. Worries that the Fed is reducing its stimulus measures are helping to make taking a strong position in any sector little more than a guessing game. There are, however, viable investment opportunities to be had in the oilfield equipment and services industry. In fact, oil services are actively garnering an incremental share of aggregate GCI in the growing global oil industry; this against oil producers and refiners. For the five years, encompassing 2005 through 2010, the share of oil services in overall industry GCI increased from 8.6% in 2005 to 12.7% in 2010. Furthermore, in its report Oilfield Service Industry to 2017, GBI Research forecasts that the global value of the oilfield services industry will climb to $213 billion by 2017 from $152 billion in 2012 due to thriving exploration and production. This is a tidy increase of 40.1%.
The Dow Jones U.S. Select Oil Equipment & Services Index was formed in 2006 to track the operations of the U.S. companies from the oil equipment & services sector. According to the most recent data from S&P Dow Jones Indices, the index is trading at a forward P/E of 14.12x and a P/B of 1.68x. Investors should note that oilfield services stocks are considered cyclical with high margins during prosperous times and suppressed margins during times of economic slowdown.
An important driver for the sector is shale oil. Morgan Stanley (NYSE: MS) predicts that shale oil production will increase about five times by 2016, which should augment the number of rigs supplied by oil-services companies. In general, the companies in the sector will profit from the growing exploration of non-traditional oil deposits. In addition, the exhaustion of the so-called "easy oil" reserves will increase outlay on services and on improved extraction technology to capture difficult to get to reserves.
Companies in this sector of the industry comprise two core types; entities that rent drilling rigs and those that afford a variety of services to evaluate, construct, and maintain oil and gas wells. The principal service and equipment providers such as Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB), offer the most encompassing range of capabilities. In the space of small-cap oil and gas service companies there are plenty of options from which to choose. As the market of North American drilling activity is predicted to be robust over the next few years, oil service stocks will continue to have a nice tailwind. Smaller players such as OriginOil Inc. (OTCBB: OOIL) and GasFrac Energy Services, Inc. (OTCBB: GSFVF) usually focus on a market niche such as fracking.
Schlumberger is the largest oil services company globally with a current market cap of $98.62 billion. In addition, it has a more attractive growth profile compared to its peer set. It has the highest operating margin in the sector and leads its competition in terms of advances and cost control. SLB is well positioned to benefit from higher growth in E&P investments outside of North America; 68% of its revenue is from outside the region compared to an average of 49% for its peer set. Higher operating margins from these international operations will lead to overall margin expansion.
At the opposite end of the spectrum, micro-cap OriginOil offers a unique investment opportunity. The company’s fracking services utilize its Clean-Frac system. Positioned as a technology company, OriginOil doesn’t define itself as a vendor or service provider. Instead, with its patented technology, its focus is on licensing to OEMs. OriginOil has a proprietary process for removing 99% of contaminants from the very large quantities of water used by the oil & gas, algae and other water-intensive industries. Unlike other technologies for dealing with highly diluted contaminants, the company’s patent-pending Electro Water Separation™ system rapidly and efficiently removes organic material from large volumes of water without the need for chemicals. In oil & gas, OriginOil is helping to clean up frack and produced water more efficiently to reduce harm to the environment. On an investing note, OriginOil is well positioned to catch brisk tailwinds within the oil and gas services sector. The company has a solid management team in place with a sound business strategy. Currently, OOIL has a market cap of $6.73 million and an attractive entry point of $0.40. Keep in mind that this is a relatively new company with an equally new offering in the oil and gas services sector. It’s literally a David going up against such goliaths as Halliburton and Schlumberger. As the new kid on the block it has plenty of room to position itself for strong growth based an innovative, low cost, cleaner option and need within the sector.
The oil production sector continues to be dominated by independents, who actually prefer offerings from smaller, specialized companies like OriginOil, because they can pick and choose what they need and not be required to “drink the Kool-Aid” with a Halliburton. This is why the OriginOils of the world, with their open licensing policies, can actually get more market share over time.
Small-cap GasFrac Energy offers fracking services utilizing liquefied propane gas, rather than water to move sands down the well. The gel formula was developed mutually by Chevron (NYSE: CVX) and Halliburton and is utilized by GasFrac exclusively in Canada and on a non-exclusive basis in the United States. GSFVF developed the injection machinery to successfully use the propane gel and has several patents pending. Over the past few years, GasFrac has been sharpening the process through testing with various well owners. The company has a current market cap of $135.25 million and sits at an entry point of $2.04.
The bottom line is that the oil equipment and services sector is a good long-term bet. In the short-term, expect some downward pressure from diminishing oil prices and weaker drilling activity on some of the smaller and more leveraged players. Companies such as OriginOil appear to be well positioned for the future; a high-leverage play against full-service leviathans like Halliburton.
NEW: Feature your company on EmergingGrowth.com. Find out how by filling out our referral form here... http://emerginggrowth.com/recommend-a-company-to-feature-on-emerging-growth
About EmergingGrowth.com:By offering 100% original and unmatched content by the best financial reporters, writers and bloggers in the business, EmergingGrowth.com is emerging as a leading digital financial media portal. Its services provide users, subscribers and advertisers with a variety of content and tools through a range of online, social media, mobile and other mobile outlets. Since its inception, EmergingGrowth.com has distinguished itself from other financial media companies with its sly approach to reading between the lines in order to locate that needle in the haystack. Sign up today to see what EmergingGrowth.com has to offer.
Contact:
EmergingGrowth.com[email protected]
305-323-5687
Join our Linked in Group… http://www.linkedin.com/groups/?gid=4650356&trk=hb_side_gLike us on Facebook... http://www.facebook.com/pages/EmergingGrowthcom/474647062557938
DisclosureAll information contained herein as well as on the EmergingGrowth.com website is obtained from sources believed to be reliable but not guaranteed to be accurate or all-inclusive. All material is for informational purposes only, is only the opinion of EmergingGrowth.com and should not be construed as an offer or solicitation to buy or sell securities. EmergingGrowth.com has received compensation for preparation and distribution of this piece. Full details of which can be found here, http://emerginggrowth.com/6645-2 Please consult an investment professional before investing in anything viewed within. In addition, Please make sure you read and understand the Terms of Use, Privacy Policy and the Disclosure posted on the EmergingGrowth.com website.