Chevron Corporation (CVX), Dresser-Rand Group Inc. (DRC): Trouble in the Upstream

While the oil business has been booming in the United States, not every energy company has been profiting. As crude oil prices dip, exploration and production companies suffer. There comes a point where the financial gain from drilling does not outweigh the costs of drilling. These three companies are on the wrong side of the American oil boom.

A major integrated oil and gas company

Chevron Corporation (NYSE:CVX) posted its first-quarter earnings on May 2. Earnings per share of $3.18 beat Wall Street estimates while revenue fell 6.43%. This was largely due to the U.S. upstream drilling revenue falling 25%. International revenue grew 4%.

The decline in the U.S. upstream revenue was due to the falling price of crude oil. This has helped companies that are midstream and downstream, but has hurt the upstream operators. When crude prices are low, the revenue a company can generate after drilling falls. While only 32% of Chevron Corporation (NYSE:CVX)’s upstream activity is domestic, it is making a distinct difference on the income statement.

Drilling costs have risen in the United States, as well. This has lead to an overall increase in operating expenses for drilling. Both this and the lower crude prices will likely continue throughout the year. Analysts are expecting a 1% drop in earnings this year. Watch domestic production and operating costs over the next two quarters and re-evaluate your position along the way.

Focusing on the rentals

National-Oilwell Varco, Inc. (NYSE:NOV) is an oilfield equipment supplier. Whenever a company decides to drill a well, it has to rent or purchase the right equipment. This is where National-Oilwell Varco, Inc. (NYSE:NOV) comes in.

Unfortunately for investors, this company saw a 10% drop in earnings in the first quarter of this year. Total earnings per share were $1.29. Analysts were anticipating $1.36 per share.

Lower crude prices caused a temporary decline in crude oil prices. When oil prices are lower, it isn’t as financially profitable to drill some wells. This causes equipment supplies to have a downshift in revenue. A ripple effect of raising prices to offset the lower volume of rentals then makes drilling even more expensive. It can be an unprofitable cycle.

This year, the company is expected to see an increase in revenue of 9%, but a decrease in earnings of 5%. This may not be the strongest investment right now.