2 Energy Themes for 2012 and Beyond

It's fun looking for big profits in energy among independent explorers and producers of oil and natural gas, which involves seeing which companies are cheap, have great assets, and are able to grow production economically. To truly feel the pulse of the global energy scene, however, one might follow a global company such as major equipment provider National Oilwell Varco (NYS: NOV) . A look into National Oilwell Varco's strong performance of late shows two major themes: shales and deepwater drilling.

Performance recap
In the third quarter of 2011, National Oilwell Varco had new capital equipment orders of $3.94 billion, a new record. This pushed up capital equipment backlog to $10.3 billion, a 33% increase from the second quarter. Oil and gas exploration is roaring back, and increased demand for services such as drilling and well completion means service providers are ordering new equipment to be able to meet current and future demand.

The company's new $10 billion backlog is starting to approach the level of the commodity boom of 2008, when it was just under $12 billion. Even with the onslaught of the financial crisis, the company saw only 3% cancellation from that huge backlog, much better than most people had predicted. This bodes well for the currently strong (and still expanding) backlog.

Increased shale activity
In North America, we are now seeing unconventional plays account for more than half of drilling activity and that means more orders for heavy-duty equipment. The prolific amount of oil and gas unlocked has also led to much merger and acquisition activity, such as Statoil (NYS: STO) acquiring Brigham Exploration to gain access to its liquids-rich Bakken acreage. Another big-time transaction worth noting was Marathon Oil's (NYS: MRO) acquisition of 141,000 net acres in the core of the Eagle Ford shale at $3.5 billion, which comes out to over $24,000 per net acre.

Even though natural gas prices are now depressed in the U.S., rig count has not gone down as the number of rigs in those gas plays goes down. Instead, these rigs are moving over to liquids plays, where the returns are much higher. Also, there are plenty of shale formations to be unlocked across the rest of the world, where gas prices are much higher than in the U.S. National Oilwell Varco has been making moves to be relevant in the rest of the world, as well. All told, higher demand for equipment powerful enough to unlock the shales has shown up by way of increased orders.

Deepwater, too
Earlier this year, National Oilwell Varco received a $1.5 billion order from Estaleiro Atlantico Sul, a Brazilian shipyard. The order was for equipment that will go into seven drillships for Brazilian oil giant Petrobras (NYS: PBR) , which is looking to contract for up to 28 drilling rigs for exploration in deep waters. The first contract for seven drillships won by EAS is just the first of several in Petrobras' plan to spend big in deepwater drilling in the future.

Halliburton (NYS: HAL) , one of the leaders in oil-field services, is also seeing the trend of increased offshore activity. After growing at a fairly subdued pace from 2000 to 2008, deepwater rig count has been growing rapidly in recent years. Halliburton also notes that deep water and hostile deep water are 11 times and 13 times as intensive as land, respectively.

That means that the number of technologically complex equipment needed is rapidly rising, and an equipment provider like National Oilwell Varco is poised to benefit, as are major oil-field service providers like Halliburton, Schlumberger (NYS: SLB) , and Baker Hughes (NYS: BHI) .

Foolish bottom line
A look at the global energy scene shows increased activity from unconventional sources such as the shales and deepwater drilling. Since we're not finding super oil fields like we once did, this trend is likely to continue in 2012 and beyond. One of the many ways to play this ongoing investment theme is to look at equipment maker National Oilwell Varco, since increased activity in new areas means more technologically advanced equipment may be needed.

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At the time thisarticle was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You can follow him on Twitter to stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National Oilwell Varco, Statoil A, and Petroleo Brasileiro. 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.

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