Dressing Up Oil Rigs is Back in Vogue
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Follow the money.” Oil and gas companies are following that mantra because their profits are depending on it.
In recent months large oil companies like ExxonMobil, Chesapeake, and BP (NYSE: BP) have shirked unprofitable natural gas drilling in favor of more lucrative oil drilling. The United States Oil (NYSEMKT: USO) ETF, for example, traded as high as $37.17 last week as oil eclipsed $100 per barrel. Further, oil prices could continue to rise as the Fed begins to buy up $40 billion in mortgage-backed securities, putting excess cash into the market.
The price move has forced oil companies, desperate to boost drilling, to buy new rigs and to outfit older rigs with newer equipment. The obvious beneficiaries are the oil rig equipment makers – their business is back in vogue.
In addition, regulatory requirements are also giving the equipment makers a reason to rejoice. BP’s 2010 Deepwater Horizon spill was the worst offshore spill in the history of the U.S., and one of its main causes was a faulty blowout preventer. The blowout preventer is a four-story-tall stack of valves that seals off the well by applying thousands of pounds of pressure to blocks that close around the pipes.
The BP spill has regulators requiring drillers to update and secure their drilling rigs, especially in offshore locations.
Outfitting the Rigs
Drillers are buying new rigs and refreshing their old rigs. The drilling business is cyclical. In the 1970s and 1980s rigs were selling hard and fast. But from 1989 to 2004 the entire industry sold just 92 rigs, an average of less than one per month. However, orders, which can be as high as tens or even hundreds of millions of dollars, began to turn around in 2010, and in 2012 the industry sold an average of eight per month.
As a result of the industry boom three rig outfitting firms have reaped exceptional profits. National Oilwell Varco (NYSE: NOV) has ramped up sales 35% last quarter to an astonishing $4.7 billion. Also, the company reported $907 million in quarterly profits as it began to outfit companies with rigs and devices like blowout preventers. Further, the company traded near its 52-week high of $87.72 last week.
Also, Cameron International (NYSE: CAM) saw its profits soar. Cameron trades at a high P/E ratio of 25.5 and just saw its 52-week high of $60 last Friday. Cameron set a quarterly sales record, bringing in $2 billion, and it booked $175 million of that as profit. Cameron will likely continue to grow as it builds out its outfitting business.
Finally, General Electric’s (NYSE: GE) oil and gas segment recorded an 11% increase in its quarterly profits. The division raked $535 million in earnings as it took advantage of the offshore drilling boom. GE set a new 52-week high of $22.37 on Friday on volume of 100 million, a far increase over the three-month average volume of 44 million.
A Sustained Trend
Many of the drilling rigs 30 years old or more are in need of retooling or replacement. Moreover, the older rigs are not suitable for deep water drilling or for shale drilling, giving the outfitting companies a longer-term market.
Drillers are also more cautious. Some of the major drillers want their rigs to be equipped with two blowout preventers, so that the rig can keep drilling when one is taken down for repair. In short, the high price of oil has triggered a gold rush of drillers to explore offshore and shale drilling, despite the new regulations stemming from BP’s oil spill
For the next few years outfitting oil rigs will be a hot industry – just so long as the drillers keep “following the money.”
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services recommend 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. If you have questions about this post or the Fool’s blog network, click here for information.