RealMoney Ratings: Oil Services Pump Out Profits

The energy equipment and services industry is comprised of companies primarily engaged in oil and gas drilling, as well as equipment manufacturers and providers of supplies and services to companies involved in the drilling, evaluation and completion of oil and gas wells.

The U.S. oil- and gas-field services and equipment industry consists of 8,000 companies with a combined annual revenue of $25 billion; large global suppliers include Halliburton (HAL - commentary - Cramer's Take), Schlumberger (SLB - commentary - Cramer's Take) and Baker Hughes (BHI - commentary - Cramer's Take). Despite recent consolidation, the industry is still fragmented and characterized by small specialty firms, which are by nature labor intensive.

The demand for these services is driven primarily by production levels in response to worldwide demand, the changing in production profiles of existing fields (mix of oil, gas and water in the production stream and the level of contaminants) and the discovery of new oil and gas fields.

Other factors influencing demand include the quality of new hydrocarbon production, investment in exploration and production efforts by oil and gas producers, and the increasingly remote locations of new production. The profitability of individual companies depends primarily on the level of technical expertise and efficiency of operations.

Going forward, the industry is faced with a number of challenges: including limited investment opportunities by exploration and production (E&P) companies and challenges of E&P projects that are being pursued in Africa and Asia.

Besides these, the industry faces challenges from declining production in existing oil and gas fields. The mix of oil, gas, water and contaminants produced from mature field changes is leading to lower quality or contaminated hydrocarbon streams, thereby stressing the need for additional and more sophisticated equipment.

Also, enhanced specifications and performance standards, environmental regulations, cost-reduction requirements, the need to reduce space and the weight of equipment and other similar considerations necessitate better technology in production systems.

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This article was written by a staff member of TheStreet.com Ratings.