Upstream operators’ capex cut
In the past couple of years, some of the major US upstream and integrated companies have reduced their capital expenditures, following the sharp decline in crude oil prices. From 4Q15 to 4Q16, 18 of the most prominent names in this space, in aggregate, have slashed their capex 28%.
Lower upstream capex resulted in lower prices for oilfield services and equipment (or OFS) companies’ services and products, which reduced OFS companies’ operating revenues and margins.
From 3Q16 to 4Q16, however, upstream companies’ capex increased 19%, as crude oil prices started to recover in 2016. Please read Is the US Delaying the Crude Oil Market’s Rebalance? to learn more about crude oil production and prices.
Higher capex on energy drilling and production can lead to improved margins for OFS companies going forward.
National Oilwell Varco’s EBITDA margin
As shown in the chart above, National Oilwell Varco’s EBITDA[1. earnings before interest, tax, depreciation, and amortization] margin was severely affected, as upstream companies slashed budgets and renegotiated contracts with OFS companies.
From 4Q15 to 4Q16, National Oilwell Varco’s (NOV) EBITDA margin (or EBITDA as a percentage of revenues) crashed, dropping from 6.8% to -45.3% during this period. EBITDA margin is a measure of a company’s operating earnings. National Oilwell Varco comprises 0.06% of the iShares Dow Jones US ETF (IYY). The energy sector makes up 6.3% of IYY.