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Reserve replacement and the need to increase cash flows can encourage companies to make very poor decisions. The fracking boom has produced a number of winners, but the long term profitability of the industry is still unclear. Investing in drillers who need $5 /MMbtu -$8 /MMbtu to breakeven but are forced to accept the market rate of $3 /MMbtu-$4 /MMbtu is a dangerous long term proposition. The recent fiasco with Chesapeake has shown that eventually the economic reality will catch up to the geological reality. Oil service firms make money with every well drilled and are not subject to the same risks as drillers. Selling drill bits may not be as glorious as finding a major oil field even though it is much easier to remain solvent selling the former.

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National Oilwell Varco (NYSE: NOV) has existed for more than a century and continues to develop technologies to serve the oil industry. Rig technology and petroleum services & supplies are the major business segments of this firm with distribution and transmission rounding out their product segments. National Oilwell Varco continues to grow through acquisitions and recently Robbins & Myers shareholders approved a merger between the two firms. Selling one product and making profit on the add-ons is an age old business technique. National Oilwell Varco is in a great position to sell extra services and other products to their customers who have already bought rigs or other services. The company has a very low total debt to equity ratio of .08 along with a small yield of .7%. High energy prices have allowed the firm to post 5 year revenue growth of 10.1% and 5 year EPS growth of 5.7%. The company is expected to grow 2013 EPS to $6.50 and yet they trade at a current P/E ratio of 12.8. It is not common to find a high quality company with a strong growth profile to trade at such low valuations. 

Cameron International (NYSE: CAM) and Schlumberger, Limited (NYSE: SLB) recently came together to make a new joint venture called OneSubsea which is majority owned by Cameron. The main thrust behind this joint venture is to combine Schulmberger's subsea measurement, boosting, and processing systems with Carmeron's subsea production systems. The opportunity in this area is exciting given the continued growth in offshore fields and the search for deeper fields. In the long run the opening up of the artic should favor OneSubsea.

Cameron's balance sheet is near industry norms with a total debt to equity ratio of .38. Their ROA and ROI are not as impressive. With an ROA of 6.0% and a ROI of 8.6%, Cameron is a tad less attractive than National Oilwell Varco or Schlumberger. Again, Cameron's EBIT margin of 10.9% and profit margin 7.8% place them behind Schlumberger and National Oilwell Varco. The expected 2013 EPS for Cameron is around $4.07 which gives them a forward P/E ratio of 14.5.

Schlumberger's numbers are very impressive with a ROA of 9.4% and a ROI of 12.8%. Their EBIT margin of 17.9% and profit margin of 13.0% are also very strong. Schlumberger's market cap is around a $100 billion which is many times larger than the other firms mentioned here. This firm is on the pricier side with a current P/E ratio of 17.7, but their forward 2013 P/E ratio of 15.8 is close to that of their competitors. Schlumberger looks like a stronger investment than Cameron due to their greater margins, ROA, and ROE. 

Baker Hughes (NYSE: BHI) has endured a difficult period of change over the past couple years. This article highlights how customer satisfaction has taken a hit. Their ROA of 5.3% and ROI of 6.8% are rather low. Baker Hughes' EBIT margin of 10.6% and profit margin of 6.6% are not near those of Schlumberger or National Oilwell Varco. A quick look at Baker's P/E ratio of 13.3 shows that the company is trading on the cheap side, though National Oilwell Varco is cheaper and has a stronger ROA and ROI. 

Conclusion

The oil services industry is ripe for investment. Recently drillers have pulled back on their drilling programs to try and boost prices. This decrease in drilling activity has caused cheaper valuations for oil service firms. The oil services industry is a great industry to be in as the high level of technological complexity helps to increase the barriers to entry. At the same time it is easy for firms to bundle their products and services to increase revenue. National Oilwell Varco is a strong company with little debt and is trading at a low valuation. Schlumberger is another attractive investment due to their size, new joint venture with Cameron, and reasonable 2013 P/E ratio. This industry does not offer the same potential growth as the exploration and development juniors. Regardless, investors should not ignore the low valuations and relativity steady income offered here.


MrCanadian1 has no position in any stocks mentioned. The Motley Fool recommends National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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