High Oil Prices Drive Pricing Power for Oil Services

June 30, 2011

The North American drilling increase in hard-to-reach oil reservoirs — basins, shales, ultradeepwater — caused by high oil prices is resulting in increased pricing power for oil services companies, as E&Ps move to higher-quality equipment and fit-for-purpose assets, says R. Thaddeus Vayda, Managing Director at Stifel, Nicolaus & Co., Inc.

“If there is one thing the industry can do efficiently once prompted, it is add capacity: rigs, pressure-pumping kit, coiled tubing, ROVs,” Vayda said. “This won’t last forever. It never does. But in the here and now, it looks as though select North America-leveraged equipment and services investments can remain appealing well into 2012.”

Vayda likes National Oilwell Varco (NOV), which has 70% to 75% share of the drilling equipment manufacturing market. Vayda currently has a $95, 12-month target price on the company’s shares, and he says bookings for NOV could be $8 billion over the next 12 to 18 months.

“We’ve seen a fairly significant increase in ordering activity for all manner of drilling and completion assets — in large part the result of operator preference for newer, safer, more efficient kit that is well suited to the challenges of today’s drilling demands, both on- and off-shore,” Vayda said.