Investors continue to hope for signs of progress as negotiations between the United States and Iran have broken down. The logic is straightforward: A peace agreement could reduce geopolitical risk, lower energy prices and reduce concerns about disruptions to the Strait of Hormuz. This should all be good news for the broader stock market.
Perhaps.
But I suspect many investors are focusing on the wrong takeaway.
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The more interesting question is whether the conflict permanently changes how countries approach energy security.
Think about COVID-19 and the way it transformed global supply chains. For decades, companies optimized for efficiency. The pandemic then exposed the risks of depending on a single supplier or a single region.
“Just in time” became “just in case.” A movement toward diversifying suppliers, reshoring production and prioritizing resiliency soon followed.
I expect energy will follow a similar path.
If recent events encourage governments and energy companies to place a greater value on resiliency and dependability — even when it comes at a higher cost — I believe the setup for oilfield service stocks may be more attractive than many investors realize.
How has the oilfield service industry changed?
Oilfield service companies provide the technology, equipment, expertise and manpower needed to find, drill, complete and maintain oil and gas wells. Whether an energy company is developing a new offshore field, maximizing production from an existing reservoir or repairing aging infrastructure, oilfield service companies are often central to the process.
Historically, the industry developed a reputation as one of the market’s ultimate boom-and-bust sectors. When oil prices surged, producers rushed to drill more wells. When prices collapsed, spending dried up almost overnight. Service companies were often caught in the middle.
That history is real. But the oilfield service industry today is very different from the one many investors remember.
The three dominant players are SLB, Halliburton and Baker Hughes.
- SLB (SLB) is widely regarded as the industry’s technology leader and has the deepest international footprint
- Halliburton (HAL) is perhaps best known for its leadership in hydraulic fracturing and remains the most direct way to gain exposure to North American shale activity
- Baker Hughes (BKR) has differentiated itself through growing exposure to liquefied natural gas, power generation and other energy technology
While each company has different strengths, all three stand to benefit from a world that increasingly values dependable energy supply.
This opportunity comes at a time when energy producers themselves have changed quite a bit. A decade ago, many exploration and production companies prioritized production growth above all else.
Today, shareholders are demanding capital discipline, free cash flow and returns. That shift may not generate the explosive growth that once characterized energy upcycles, but it could also result in a less extreme boom-and-bust cycle for service providers than investors experienced in the past.
Why should investors be optimistic about the sector?
The first reason I am optimistic about the oilfield service industry’s long-term prospects is straightforward: The world still needs enormous amounts of oil and natural gas.
That may sound obvious, but investors continue to underestimate how difficult it is to replace existing energy infrastructure. Even as renewable energy grows, economies remain heavily dependent on fossil fuels and the countless products derived from them. The Iran conflict served as a reminder of that reality.
The second reason is that energy security is becoming more important.
For years, many countries focused primarily on securing the cheapest energy available. Going forward, some may place greater emphasis on securing energy from dependable partners and politically stable regions.
That shift could encourage development in areas that previously looked less attractive economically but offer strategic advantages.
More development means more drilling. More drilling means more demand for oilfield services.
The third reason is international growth.
Many investors instinctively think about U.S. shale when they hear the word “oil.” Yet some of the most attractive opportunities for service companies may be found overseas.
International and offshore projects are often larger, more technically demanding and more service-intensive than their North American counterparts. They also tend to be driven by long-term development plans rather than short-term commodity price movements.
That plays directly into the strengths of the industry’s largest participants.
Where are the opportunities?
Venezuela offers an interesting example.
Recent agreements involving Shell (SHEL) and BP (BP) suggest international energy companies see potential in bringing portions of the country’s vast energy resources back into production.
After years of underinvestment and deteriorating infrastructure, doing so would require extensive technical expertise, well rehabilitation, equipment upgrades and project management — the exact types of services oilfield service companies provide.
Importantly, investors do not need Venezuela to become a success story for this thesis to work. Nor do they need oil prices to surge.
That is what makes the opportunity interesting.
The investment case does not depend on a single country, a single conflict or a single commodity forecast.
Oil and gas fields naturally decline over time. Existing infrastructure must be maintained. New projects must be developed. Production must be optimized.
The world needs energy today and will need enormous amounts of energy for years to come.
Some investors spend a tremendous amount of time trying to predict where oil prices will go next. I believe a more productive exercise is identifying the companies that help make energy production possible, regardless of where oil trades next month, and considering what recent events may mean for energy security over the next decade.
Oilfield service stocks are increasingly removed from the cyclical industry of the past that was tied to the next move in crude oil.
Here’s the more durable reality: The world needs dependable energy, and oilfield service companies may play a critical role in making that possible.