Building Your Oilfield Services Portfolio -- Part 1

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While crude oil has just completed another swing above $100 a barrel and then slid back somewhat, it nevertheless remains well above the mid-$70s level where you'd have found it just over a month ago. As such, especially if you're buying for a reasonably lengthy time horizon -- which should be the case with all Fools -- I continue to believe that energy names should comprise a meaningful portion of our investment allocations.

Beyond that, I strongly suggest that you not ignore the services side of the sector. However, unless you've been an energy aficionado for some time, the actual functions of the individual oilfield services companies can be confusing. With the producers, we all know pretty much what they do, and where they do it: The integrated majors -- ExxonMobil (NYS: XOM) and its peers -- are widely spread geographically and refine and market what they've produced upstream. The independent producers either confine their activities to the U.S., as does Chesapeake Energy (NYS: CHK) , or spread themselves to foreign venues, such as Apache (NYS: APA) .

Four big teams at your service
But getting your arms around the service providers can be a little more challenging. Oh, sure, we we know that Schlumberger (NYS: SLB) , Halliburton (NYS: HAL) , Baker Hughes (NYS: BHI) , and Weatherford (NYS: WFT) are generally categorized together, given their size and worldwide operations. On that basis, in this part of our examination of the services side, let's assume you're relatively new to the group. With that in mind, let's take a brief look at the four largest companies and then attempt to bring order out of what may seem occasionally chaotic with the smaller companies in Part 2.

One awfully hot Baker
Despite my intention to focus somewhat on Schlumberger, I hope you won't assume I'm down on Baker Hughes. The Houston-based company has been providing top-of-the-line products and services for more than a century. Its more than 50,000 employees ply their trade in 80 countries working for and consulting with public operating companies and national oil companies (NOC).

In addition to supporting its customers throughout the upstream cycle, Baker Hughes' rotary steerable systems, drill bits, motors, specialty chemicals, and drilling fluids have long been considered the proverbial cream of the crop. Add well-completion solutions, coring services, pressure pumping, training, and information on the working rig count, and you have a solidly integrated company with a bright future.

Company

Market Cap

Return on Equity

5-Year Trailing Yield

Baker Hughes$22.9B12%1.10%
Halliburton$32.1B24.6%1.20%
Schlumberger$94.2B14.1%1.20%
Weatherford$10.7B2.9%N/A

Source: Yahoo! Finance.

Halliburton, the second-largest of the service companies, also plays a major role in the upstream operations of its customers. From assisting in locating hydrocarbons, to participating in the drilling and formation evaluation processes, to well completion, and on to production enhancement, the company is major factor in exploration and production worldwide.

The frazzled king of fracking
At the same time, the company is a leader in the development and expansion of hydraulic fracturing ("fracking"), which it initiated in the 1940s, or before most Fools were born, but which has played a major role during the past decade in permitting the production of vast new quantities of natural gas and oil in the United States. Key to the company's efforts in the fracking arena is the maximization of environmental safety in the rapidly expanding function.

Are you beginning to notice some overlap among the functions performed by the big service companies? Geneva-based Weatherford also provides a host of equipment and services used in the upstream operations of oil and gas companies worldwide. Its products include artificial systems, production metering and control systems, and pressure-control equipment. Among its services are wireline, fishing, and through-tubing services.

As with the other major companies, Weatherford has recently increased its work in Iraq. Indeed, a month ago, it garnered a contract to build early production facilities at Iraq's untapped Garraf field in the southern part of the country. Operators at the field are Malaysian Petronas, Japan Petroleum Exploration, and Iraq's South Oil Co.

Big Daddy and his helpful glossary
The largest of the oilfield services companies, with a market capitalization triple that of Halliburton, Schlumberger employs in excess of 110,000 employees, representing more than 140 nationalities and operating in approximately 80 countries. The company provides a vast array of oilfield products and services, including directional drilling, formation evaluation, cementing, and well stimulation and completion, along with consulting and information management software.

In addition, the company operates WesternGeco, the world's largest -- and, I would argue, most sophisticated -- seismic company. The seismic function is becoming progressively more vital as exploration and production companies move into previously untapped venues.

Just to mention a couple of its significant international ventures, Schlumberger is involved in a cooperative agreement with Petrobras to perform research on pre-salt technologies. Further, after initiating operations in Russia in 1929, Schlumberger is involved in all of the country's oil-producing regions. I fully expect the big service company to play a substantial role in benefiting the joint venture recently signed by ExxonMobil and Russia's state-controlled Rosneft, which will operate together in the Russian Arctic and the Black Sea.

No doubt you've found some of the terms I've used so far are as clear as, well, drilling mud. I believe that an energy portfolio should include representation from one or more of the major international service providers, but should you focus on, say, Baker Hughes or Halliburton, your energy education should include familiarity with the substantial oilfield glossary in Schlumberger's website. Should you find an unfamiliar term, simply access that company's website for a clear, concise clarification of what is being communicated in "petroleumese." The company's glossary will include thousands of frequently arcane terms from the industry.

A Foolish conclusion
I must admit to a preference for Schlumberger among the service group's big four. In part, I'm attracted to the company's rapt attention to R&D, upon which it expended $910 million last year. Nevertheless, given both the rapid changes in oil and gas production, both in the U.S. and abroad, and my longtime interest in the group, I suggest you monitor at least a couple of the companies on your version of your Watchlist. Just follow the links to add Schlumberger, Baker Hughes, Halliburton, or Weatherford.

In Part 2 we'll establish a simple system for categorizing -- and therefore better understanding -- the array of smaller companies in the industry. 

Looking for more ideas? The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies. Get instant access to the names of the three oil stocks -- it's free.    

At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter servicesfree for 30 days.We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Fool contributorDavid Lee Smithdoesn't own shares in any of the companies mentioned in this article. The Motley Fool has adisclosure policy.

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