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Hi Protovist - Neither NOV nor TS rely solely on oilfield services for their revenues, but it's a sizeable component. Rotary rig count is a pretty good leading indicator for oilfield services companies. When the rig count is increasing oilfield services companies do extremely well. When the rig count is stable, the stocks of the oilfield services companies don't do much at all. When the rig count drops then look out below if you own stock in oilfield services.

The count increased from around 2,000 in 2003 to 3,500 in 2008 and oilfield services companies turned in stellar results over the period. A count of 3,500 in 2008 is a significant peak over the 15 years prior to 2003 when the count averaged around 2,000+-. To find another peak in rig count you have to go back almost 30 years.

If you go back to the late 70s early 80s the rig count ran up to over 6,000. That was an unsustainable level and the count rapidly dropped to 2,000 in about 4 years. That directly led to the mega-bust in oilfield services in the mid 80s.

Given the lead time involved in construction of new rigs, additional rigs will be added worldwide in 2009 and 2010, but the number of new rigs is projected to be lower each year. The number of rigs that will be taken out of service is unclear right now.

Most people talk about oil price as the driving factor for drillers and oilfield services, but the price of natural gas is at least as important. Since gas and oil have been fairly well correlated and more people are familiar with oil, let's just talk oil. The spike in rig count in the late 70s early 80s followed an increase in oil prices from $10 to $30 a barrel. The recent spike in oil prices has also been accompanied by an increase in rig count as discussed above. Ignoring the runup to $140+ earlier this year (which may or may not have been an aberration), a current price of approximately $60 a barrel represents a significant increse over the last 5 years and if that price is sustained, drillers and oilfield supply companies probably won't see much in the way of growth, but their market won't collapse and the stocks may come back up a little in the near term as perceived risk is reduced.

If oil moves up to to the $75 target that OPEC (Saudi) is trying to get to, there may be some room for additional near term growth in both the drillers (NE) and oilfield supply (NOV, TS). But given the current rig count, things are probably close enough to a peak to be concerned about a longer term investment in oilfield services.

If economic issues continue to pressure the price of oil, then all bets are off. At a low enough price (<$45?) the drillers will be forced to start stacking rigs and their results will be disappointing to say the least. If they start cannabalizing the stacked rigs, the oilfield services companies will be devastated just like they were in the mid 80s.

So (finally!!) to answer your question, NOV and TS could represent interesting alternatives to NE in an environment of rising oil and gas prices baecause they can benefit from a switch to unconventional supplies that represents a risk for NE. In an environment of stable oil and gas prices, none of NE, NOV or TS would likely be very exciting investments. If oil and gas prices continue to decline and the rig counts starts dropping, NOV and TS could be substantially worse investments than NE.

If you are going to invest in oilfield services, keep an eye on the rig count.

Ed
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