The oil and gas equipment and service industry has historically experienced significant volatility due to lower oil and gas prices.
Demand for oil and gas services and products depends primarily upon the level of activity in the oil and gas industry worldwide. High levels of drilling and well remediation activity generally drive demand for the products and services used to drill and remediate oil and gas wells.
High levels of oil and gas activity increase cash flow available for oil and gas companies, drilling contractors, oilfield service companies, and manufacturers of oil country tubular goods (OCTG) or pipe to invest in capital equipment.
Declines in prices or market expectations of falling prices negatively affect the business in oil and gas equipment and services.
Sustained periods of low oil prices typically result in reduced exploration and drilling because oil and gas companies’ capital expenditure budgets are subject to cash flow from such activities and are therefore sensitive to changes in energy prices.
Thus changes in commodity prices can have a dramatic effect on rig demand, and periods of low demand can cause excess rig supply and intensify competition in the industry, which often results in drilling rigs, particularly older and less technologically-advanced rigs, being idle for long periods of time.
In order to get a clear picture of the industry, I selected three big players in the oil and gas equipment and service industry including National-Oilwell Varco, Inc. (NYSE:NOV), Halliburton Company (NYSE:HAL), and Baker Hughes Incorporated (NYSE:BHI).
National Oilwell Varco
National-Oilwell Varco, Inc. (NYSE:NOV) supplies equipment which is used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry.
The firm supplies nearly all of the equipment needed for offshore and onshore drills. In the last three years the company has shown a tremendous performance due to an increase in oil rigs in the years 2011 and 2012, and this is the reason the company has managed to grow its revenues at a Compound Annual Growth Rate (CAGR) of 28.04%.
Despite tough competition, the company’s margins were slightly hurt last year, with a 17.7% operating margin and a 13% net margin respectively, but the company successfully raised its return on invested capital from 11.32% in 2011 to 11.83%in 2012, respectively. The company has recently raised debt to finance in its operations to meet the increasing demand.
Halliburton
Halliburton Company (NYSE:HAL) is a provider of services and products to the energy industry related to the exploration, development, and production of oil and natural gas.
