Trouble in the Upstream

Austin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

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 (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’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 (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 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. 

The equipment manufacturer

Dresser-Rand (NYSE: DRC)  is a manufacturer of oilfield equipment for the oil, gas, and petrochemical industries. The company posted strong earnings for the first quarter of this year. Earnings per share were $0.43, a 39% increase from the same quarter last year. Revenue rose 16%, as well. 

For the first quarter, it did see higher volume in sales, but it also had higher prices. The company not only provides and manufactures new equipment, but it also manufactures after-market add-ons for its machinery. This accounts for nearly 75% of its total revenue. So, updates and repairs on equipment in the field will fuel revenue growth this year. 

Dresser-Rand is expected to see more growth this year. Analysts expect revenue to hit $3.5 billion. Management expects new bookings to make up about half of that. Earnings are expected to shoot up due to an increase in price for its products and services. 

Final thoughts

Traditional economics tells us that the supply and demand for crude oil will even out. The price of crude will continue to fluctuate and some companies will suffer temporarily. Don’t look to these for any strong gains right now. It is important to re-evaluate in the next quarter to see if these companies fit with your investment strategies. 

Chevron is a large, multinational company that has operations all over the world. Any decline in prices in the United States will only account for a small portion of the bottom line. National Oilwell is closely affected by drilling revenue, so this company has the most to lose, or most to gain in the near future. 

National Oilwell Varco is perhaps the safest investment in the energy sector due to its industry-dominating market share. This company is poised to profit in a big way; its customers are both increasing the number of new drilling rigs and updating aging fleets of offshore rigs. To help determine if it could be a good fit for your portfolio, you're invited to check out The Motley Fool's premium research report featuring in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now to claim your copy.

Austin Higgins has no position in any stocks mentioned. The Motley Fool recommends Chevron and National Oilwell Varco. The Motley Fool owns shares of 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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