Falling production volumes from existing oil wells, coupled with high oil prices, have increased the incentive for big oil companies to invest more in exploration during the past two years. This has driven oil companies to some hostile environments, resulting in some very heavy capital spending. For example, the recently completed Kashagan oil field, the largest oil development outside of the Middle East, is estimated to have cost around $41 billion and is under constant attack from huge floating blocks of ice.
Indeed, the 300 or so companies that account for over 90% of capital spending within the oil and gas space are already showing 13% year-on-year gains in capital expenditure spending. What’s more, this is the fourth year in a row of sustained, double-digit growth in capital spending within the sector, driven by high oil prices, which has allowed many companies to take on previously un-economically viable projects.
Offshore growth is fastest
It would appear that the majority of this capital spending growth is coming from offshore drilling projects. In particular, the Gulf of Mexico, where producers believe they will need an extra $16 billion worth of rigs to handle the current drilling programs in place until 2015. Indeed, according to one analyst, onshore oil and gas capital spending is expected to increase by high single-digits this year, while offshore oil and gas spending is expecting to see mid-teens double-digit growth
All this growth makes the oil service companies look highly attractive. Of course, the key companies set to benefit here are world’s biggest; international oil services companies, Schlumberger and Halliburton Company (NYSE:HAL).
Unfortunately, Halliburton Company (NYSE:HAL) is still suffering a hangover from the Macondo disaster. That said, the company is working hard to shake off any association with the incident, already agreeing to pay $380 million in eight installments over the next two years to settle with the Department of Justice. Still, the company is yet to fully settle with the Planning/Steering Committee and the states concerned with the disaster. Halliburton Company (NYSE:HAL) has, however, been preemptive, already provisioning $1.3 billion for Macondo related fines. While the final fine could be larger, Halliburton Company (NYSE:HAL)’s preemptive charge has removed some uncertainty.
Best in class
Of course, it would be foolish to write an article on rising capex in the oil and gas sector without mentioning National-Oilwell Varco, Inc. (NYSE:NOV). In many ways, National-Oilwell Varco, Inc. (NYSE:NOV), although smaller, is better positioned to benefit from rising capex spending than Halliburton. I say this because National-Oilwell Varco, Inc. (NYSE:NOV) is only involved in the production of equipment and not the operation of oil wells, unlike Halliburton Company (NYSE:HAL), which has a bigger role to play in the overall day-to-day operation of the wells.
Actually, a good example of this can be seen by comparing the gross margins of the two companies. Halliburton Company (NYSE:HAL)’s trailing-twelve-month (TTM) gross margin stands at 14.4%, meanwhile, National-Oilwell Varco, Inc. (NYSE:NOV) notched a gross margin of 24% for the same period.