Kent Moors: Don’t look now, but the rig market for oil and gas projects is heating up again.
After suffering through a period when rigs were being “retired” from the field, the pendulum is swinging back again. Rigs are suddenly in high demand — and hold the secret to how to invest in the growing U.S. shale oil boom.
This is hardly surprising. Without a rig, a well is nothing more than a place marked on a map.
That’s why the oil field service (OFS) business always improves before the fortunes of field production companies.
But did you know there’s an even earlier link in this profit chain?
Without it, the OFS business wouldn’t exist and neither would the all of those oil wells. Yet what goes on in this portion of the business rarely gets reported on.
Nonetheless, it’s the home of one of my favorite oil and gas plays…
The Equipment That Keeps it All Running
Of course, I’m talking about the companies that manufacture and distribute all of the massive equipment each well requires.
From pressure pumps to drill bits, down-hole motors and more, these are the companies that keep the OFS business humming.
That’s why some of the biggest OFS providers – like Schlumberger (NYSE: SLB), Halliburton(NYSE: HAL) and Weatherford International (NYSE: WFT) – have been buying up oil and gas equipment companies.
It’s part of an ongoing move by the big OFS outfits to consolidate access and increase profitability.
But the market for equipment in general and rigs in particular is a very fluid one.
There is also another factor to consider: when there’s an upsurge in equipment demand like the one developing right now, there is also an inflationary factor.
Put simply, as demand heats up, so does the pricing spiral. But that’s good news for the individual investor in the equipment sector.
In this case, the returns on the equipment slice of the business are registered up front, while the downward drag takes place further down the chain.
When considering how to invest, it is also important to remember that the oil-and-gas-equipment market is global. While rig demand is growing in North America, the need to develop fields is even more pressing in other parts of the world.
That’s adding even more overall demand to a business with already limited availability. And unconventional production (shale gas, tight gas, shale oil, tight oil) has only made this situation worse.
Since the pay zones in these fields are horizontal rather than vertical, drilling equipment is more expensive and subject to more frequent delays in availability.
And then there is the peripheral footprint on the surface.
Fracking work at unconventional sites requires water pushed downhole under heavy pressure. That, in turn, requires a large array of pumping trucks and ancillary equipment surrounding the well head, along with compressor stations (to maintain pipeline pressure levels), retention basins (for flowback water) and a range of site-specific processing and separation units.
A working well is a massive array of parts and machinery.
In fact, here’s a photo that shows just a portion of what the pumping footprint at a small frack operation looks like:
And this picture does not include everything else that is needed on the surface.
All of these things have major implications for the use and rates of a broad range of equipment. Add to this the repair/maintenance component, and there are solid prospects for a retail investment return.
The only question is how to invest in this trend…
How to Invest in Oil and Gas Field Equipment
With all the M&A going on in the OFS sector, and its reach further “upstream” into the manufacturing and distribution segment, figuring out how to invest in these opportunities could be a full-time job.
But it doesn’t have to be with the two suggestions I’m about to give you.
The first is to use exchange traded funds (ETFs) that focus on the equipment and its utilization.