Oil-Field Stocks With Maximum Potential
Last month, I wrote a pair of articles about the oil-field-services sector, beginning with the four well-known major companies -- starting with Schlumberger (NYS: SLB) , the major domo of the group, and moving on to the next largest of the companies, Halliburton (NYS: HAL) , etc. In the second article, I moved to a concentration on the smaller players in the sector, including energy equipment manufacturer National Oilwell Varco (NYS: NOV) .
All too often, unless you've spent a considerable amount of time in and around the energy industry, it's difficult to fathom the precise functions performed by many of the smaller companies. Frequently, the company's websites are minimally helpful, written as they are in a difficult-to-decipher language that I'll term "engineeringese." On that basis, and given my belief that the service sector will be both important and packed with investment opportunities for decades to come, I hope you'll indulge my desire to dig a little deeper into the group.
Propping fracking fissures
Let's begin with a company that has long fascinated me: CARBO Ceramics (NYS: CRR) , a Houston-based enterprise that plays a major role in the rapidly expanding (and increasingly international) world of hydraulic fracturing, or "fracking." The company's primary role in the process involves the production of ceramic proppants that are vital to our ability to efficiently produce natural gas and liquids from shale and other rock forms.
Oops, I've done it! "Proppants" is possibly a new word for most readers and borders on the engineeringese that we're trying to avoid. It's not a complex concept, however, simply referring to manufactured particles of specific sizes, produced from high-strength ceramics to hold open the fracking-created fissures in the underground rock, providing for efficient passage of the gas or liquids from the rock reservoir to the wellbore. And you thought that ceramics were limited to Grandma's cookware.
CARBO's proppants are manufactured in five types to use in various depths and well conditions. The company operates a manufacturing plant in Alabama, two more in Georgia, and one each in China and Russia. In addition to its proppants, CARBO also provides well stimulation software and fracture design, engineering, consulting, and spill-related services to oil and gas operators.
It's difficult to see how CARBO Ceramics can avoid benefiting significantly from the rapid spread of fracking around the world. Such a benefit would only add to the company's current 30% profit margin and 21.5% return on equity, while likely perpetuating its debt-free balance sheet.
Up from diving
In last month's oil-field-services article, I briefly discussed Oceaneering (NYS: OII) , a company that, since its formation in 1964 as a diving operation, has expanded to become a scientifically advanced company that provides advanced underwater products and services primarily to the oil and gas industry, although it also serves the defense and aerospace industries. Indeed, sophisticated remotely operated vehicles manufactured by the company played a pivotal role in attending to and ultimately containing BP's (NYS: BP) massive well blowout and oil spill in the Gulf of Mexico last year.
In the same article, I suggested that Fools with a taste for the oil-field-services sector develop a system of classifying the group's companies according to their relative specialties within the industry. As I noted, doing so will simplify "keeping track of companies performing similar functions and of noting when generally similar companies begin to deviate one from another from a valuation perspective."
For instance, also located in Houston, Helix Energy Solutions Group (NYS: HLX) is, like Oceaneering, a provider of offshore services, which include robotic services, reservoir development solutions, and other contracting services for various oil and gas producers. The company, which was named Cal Dive International until 2006, operates primarily in the deep waters of the Gulf of Mexico, the North Sea, the Asia Pacific, and West Africa. It installs a variety of production components including subsea pipelines, flowlines, control umbilicals, and risers.
In addition to its construction activities, it performs inspection, maintenance, and repair services, along with reclamation and remediation services. Finally, in the Gulf of Mexico, it engages in the exploration, development, and production of oil and gas from its own properties.
Comparison and contrast
Oceaneering and Helix are hardly identical companies. Even highly similar oil-field-services companies typically differ from one another in many respects. Nevertheless, the two offshore companies are similar enough that we can benefit from comparing several of their key metrics:
|Market Capitalization||$1.74 billion||$5.06 billion|
|Return on Equity||4.74%||15.78%|
|Total Debt||$1.17 billion||--|
|Trailing Annual Dividend||N/A||0.80%|
Source: S&P Capital IQ.
Clearly, Oceaneering's metrics are considerably stronger than those of Helix, from both profitability and balance sheet standpoints. The key for investors with a particular interest in the two companies -- perhaps because of a belief that offshore activity is likely to strengthen as it relates to total hydrocarbon production -- is to watch for relative changes between the two, along with changes between their niche and other areas of the overall services group.
Indeed, you might believe (as I certainly do) that both deepwater activity and onshore fracking will continue to expand in importance relative to the global production of oil and gas. Should that be the case, CARBO Ceramics, Oceaneering, and Helix Energy would all appear to have bright futures, and I'd urge you to add the trio to your Motley Fool watchlist.
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At the time this article was published The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National Oilwell Varco and Oceaneering International. 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. Fool contributor David Lee Smith doesn't own shares of any of the companies mentioned in the above article. The Motley Fool has a disclosure policy.