1 Trend and 1 Opportunity in Oil and Gas You Should Be Watching
As investors, this year brings us a lot of challenges and opportunities in the oil and gas industry. However, being aware of the latest developments and trends in the industry is of significant importance before you can proceed with your investment decisions. The oil and gas industry is especially prone to changing trends, and for reasons not just limited to volatility in the price dynamics of oil and natural gas.
Right now, I'm going to highlight one such trend in the oil exploration and production, or E&P, space that you should be aware of, and one investing opportunity that could turn out to be hugely beneficial in 2013.
The trend you should be aware of
E&P companies are set to increase their capital spending for the year 2013, an increase for the fourth successive year. According to a Barclays survey last month, global E&P spending is expected to go up by 7% this year to $644 billion. While North American spending will remain pretty much flat, international E&P spending is expected to go up by a substantial 9% to $459 billion. And that's a solid $38.5 billion higher than last year's.
Undoubtedly, some of the hottest drilling regions are offshore Latin America, Australia and Asia, and the Middle East. To investors following the oil exploration and production space, this shouldn't be surprising. Last month, Chevron (NYSE: CVX ) , had announced that the Gorgon liquefied natural gas project off Australia is going to cost a whopping 40% more than initially estimated. The total costs are now expected to hit $54 billion. The supermajor's total upstream spending is, in fact, slated to jump 16% to $33 billion this year.
Needless to say, ExxonMobil (NYSE: XOM ) and Royal Dutch Shell (NYSE: RDS-A ) (NYSE: RDS-B ) , each with a 25% stake in the project, are also expected to shoulder the rising costs. And this blowout in the Gorgon project is just one of the cases. In total, Australia's LNG boom has resulted in seven massive projects worth an eye-popping $172 billion – all of which are under construction. Naturally, costs have skyrocketed as the big spenders compete for a major chunk in the LNG pie. Keep in mind that big oil companies are struggling to maintain their overall production volumes and overcome depleting resources in their existing acreage portfolios.
Analysts, however, have warned of more cost overruns and delays in the next couple of years. Similarly, Brazil's state-owned Petrobras (NYSE: PBR ) leads the Latin American exploration space. In the Middle East, all eyes will be on Iraq where BP (NYSE: BP ) and ExxonMobil hold clout.
Where's the opportunity?
None of these ambitious projects are worth a salt without the contributions of oil-field services companies. These companies are literally the muscles behind the drilling and production companies. They provide the initial seismic mapping, drill bits, well testing, well completions, software, business solutions, and a whole basket of other related services in order to make production a reality.
There are quite a number of players in this industry, with Schlumberger (NYSE: SLB ) being the industry leader. Let's take a look at how they are placed:
All of these companies have a healthy international services portfolio. From a valuation standpoint, Halliburton looks the cheapest. However, National Oilwell Varco is another solid company, which is pretty close behind.
Why Halliburton still looks attractive
From an operational standpoint, Halliburton's international exposure is just awesome. However, the company has a significant exposure to North American drilling which has slowed down in the last six months due to poor natural gas prices. But I'm not too worried about that. Natural gas prices have started recovering, thanks to increased drilling for liquids. Either way, Halliburton isn't losing out big time. It's too early to turn naysayer.
Investors must also keep in mind that third-quarter revenue in 2012 grew a solid 24% from Middle East and Asia year over year, while Latin American revenue grew 18%. North American revenue grew 2%. Now this is impressive, and I feel this is just a precursor to greater growth. In 2011, I was betting that Halliburton would ride big on international projects despite being dragged into the Macondo blowout controversy. I still see no reason to change that view. Additionally, this company is run by a solid management.
A Fool's take
Overall, the oil-field services industry looks very attractive today from an investment perspective. Foolish investors must not pass up this opportunity.
For a more detailed analysis, The Motley Fool has brought out a new premium research report on this industry stalwart. Simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.