3 Stocks Hitting Gold in the Digital Oilfield

by Aaron Levitt | December 16, 2013 9:01 am

Technology is changing the way we produce energy. Advances in drilling — such as horizontal drilling rigs and hydraulic fracturing — have allowed oil stocks like Range Resources (RRC[1]) to pull an incredible amount of oil and natural gas from North America’s shale rock.

oil rig 150x150 3 Stocks Hitting Gold in the Digital Oilfield[2]But the latest leap in oil and gas technology isn’t so much about tapping new resources, but how to manage them. As new sources of energy have become increasingly challenging to develop, the E&P industry has turned to computerized operations in order to process the sheer amount of data thrown off by wells.

That technology has been dubbed “the digital oilfield,” and it’s set to expand exponentially as more wells are tapped across the world. For investors, playing this new world of well data management could be as big and profitable as the oil itself.

Staggering Growth in the Digital Oilfield

According to the Energy Information Administration, as of the end of 2012 there are nearly 483,000 producing oil and gas wells dotting the U.S. countryside and they all have one thing in common — they throw off tons of data. From flow rates to changes in underlying pressures, each well is constant dance of changing variables. And like many industries, understanding these variables can improve efficiencies and production amounts.

Which is why more energy firms like Exxon Mobil (XOM[3]) are changing the way they look at tapping and monitoring a well. Big Data has come to oilfields.

With the era of “easy oil” over, the costs continue to skyrocket for finding new sources of supplies and tapping those resources. With ever-increasing CAPEX budgets and dwindling profit margins staring them in the face, E&P firms have turned to digitizing operations and data mining in order to allow for real-time decision making and improvements in efficiency.

Overall, these digitizing efforts can reduce costs while improving flow rates and production amounts, meaning you can squeeze even more energy out of each well, even more cheaply than before. That’s a huge win for an oil producer’s bottom line[4].

New advancements in wireless technology, improved well-bore sensors and data-mining software have all contributed to the rise of the digital oilfield. Globally, oilfield data management spending hit roughly $18.7 billion in 2011. However, it’s only getting bigger.

According to analysts, the U.S. alone is set to see digital oilfield spending surge by 57% over the next two years to reach $16.9 billion. As more producers turn to data mining in order to improve their wells, analysts expect that by 2022, the digital oilfield subsector will be worth north of $33 billion[5] — a compound annual growth rate of 4.8%.

That means early investors can make big bucks. Here are three of the biggest and earliest players on the trend.

Rockwell Automation

When people think of Rockwell Automation (ROK[6]), the oil and gas industry doesn’t usually come to mind. That’s because the firm is one of the largest producers of equipment and software for the textile and food & beverage industries. However, ROK is quickly becoming a force in the energy sector.

Through its acquisition of vMonitor, Rockwell has become one of the leading purveyors of digital oilfield technology — in both data management and remote sensing. By using ROK’s products, well operators can improve efficiency and reduce costs by as much as 20%. That’s a huge number, which can mean the difference between failure and profitability. Needless to say, the E&P industry is flocking to ROK’s vMonitor in spades.

Rockwell estimates that its digital oilfield solutions will add about $100 million[7] to its sales in a little less than two years. With the shale and deepwater boom not stopping, ROK expects that division to be one of its largest in the long term. Meanwhile, ROK stock is still pretty cheap at a forward P/E of 16.

Baker Hughes

While Halliburton (HAL[8]) and Schlumberger (SLB[9]) are the kings of the frackers, oil service firm Baker Hughes (BHI[10]) has quickly gained the digital oilfield crown.

The creator of the digital oilfield moniker, BHI offers one of the largest ranges of products designed to improve efficiency at hydraulically fracked wells. These include its WellLink suite of software and well watching devices in addition to its BEACON remote monitoring platform. The platform allows E&P firms to centralize their entire operations from a single control room miles away from their actual wells and make real-time decisions based on data mining.

All in all, its expertise in digitizing the oilfield could give Baker Hughes a long-term leg up on its main rivals, HAL and SLB. BHI shares currently trade for a forward P/E of 12.5. But that amount doesn’t truly take into account the digital oilfields potential on BHI’s future bottom line.

Cisco Systems

That’s right, Cisco Systems (CSCO[11]). I know this may be a stretch for some investors, but the tech stalwart is becoming a huge player in data management and wireless networking solutions for the modern oil field.

CSCO’s First Mile Wireless for Drilling (FMWD) solution is becoming the standard IP protocol at many wells, allowing for communication between field and office workers as well as full automation of well activities. Cisco also provides a whole suite of security software for drilling rigs.

Providing this huge necessity — creating the required wireless network that all of this data flows on — ultimately will be an enormous win for CSCO shareholders in the future. While oilfield services are still a small part of overall business mix, the growth in energy production around the world could be a nice new source of revenues for the company — something CSCO certainly needs help with after its latest earnings report[12].

With a 3.2% dividend yield and a cheap valuation, CSCO could be one of the secret stars in the oil patch.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities. 

Endnotes:
  1. RRC: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRC
  2. [Image]: http://investorplace.com/wp-content/uploads/2012/08/oil-rig.jpg
  3. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  4. oil producer’s bottom line: http://investorplace.com/2013/12/cobalt-cie-stock-angola/
  5. north of $33 billion: http://www.offshore-technology.com/features/featuremaking-the-most-of-the-digital-oil-field/
  6. ROK: http://studio-5.financialcontent.com/investplace/quote?Symbol=ROK
  7. add about $100 million: http://www.bloomberg.com/news/2013-11-12/rockwell-sees-shale-oil-boom-adding-100-million-to-sales.html?cmpid=yhoo
  8. HAL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAL
  9. SLB: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLB
  10. BHI: http://studio-5.financialcontent.com/investplace/quote?Symbol=BHI
  11. CSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSCO
  12. latest earnings report: http://investorplace.com/2013/12/cisco-cuts-long-term-guidance/

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