The Four Best Drill Bit Suppliers

When we hear claims from oilfield suppliers of outsized productivity gains associated with a new technology, process or design, we, like many in the industry, tend to be pretty agnostic about the whole thing. After all, because a concept looks good on paper does not mean it will in reality produce repeatably constructive results for customers. In fact, far too often over-promoted products and services, and the high expectations that accompany them, are the basis for painfully low customer satisfaction ratings in EnergyPoint's industry-wide surveys. Accordingly, while drill bit suppliers have traditionally earned strong ratings in our independent studies, we have tended to cast a placidly skeptical eye toward suppliers' claims concerning recent advances in their approaches to computer-aided bit design and simulation. That is, until now.

SEEING THE BIGGER PICTURE

It's common knowledge that most operators will pay more for a better drill bit — to be precise, one that allows an oil or gas well to be drilled faster and more efficiently. So, to assist operators in drill bit selection and optimization, suppliers are now pursuing a more holistic approach, one that considers more than just past performance of a bit or bit design. Indeed, suppliers are now pre-modeling a bit's projected impact on other downhole components and equipment utilized with a bit, including the drive system. This more expansive modeling approach has purportedly led to more optimal rates of penetration, reductions in vibration, better directional control, and higher-quality wellbores.

But those are just suppliers' claims; what about the opinions of customers? Based on what we see and hear, we believe customers very much approve of the performance and value they are receiving via suppliers' current approaches. In fact, average satisfaction ratings in the category of drill bits rose in 2008 to 8.01 on a 10-pt scale, up from already healthy levels in 2005 and 2007. This is especially noteworthy given the comparatively moribund scores registered for most oilfield products, including other downhole equipment, over the period. And while respondents at larger operators continue to rate drill bit suppliers highly, it's the gathering applause we're hearing from independents that leads us to believe bit suppliers are on to something special. In fact, today's integrated and computer-aided approach to bit design and selection now appears so successful, we wonder whether expanded application of the concept to other oilfield products and services is in the offing.

HOW THE SUPPLIERS STACK UP

So, how have the industry's four major bit manufacturers fared in EnergyPoint's independent customer satisfaction surveys over the last few years? From 2005 though 2008, Smith International (SII) recorded the highest customer satisfaction ratings in the category, followed by National Oilwell Varco's (NOV) ReedHycalog, Baker Hughes' (BHI) Hughes Christensen and Halliburton's (HAL) Security DBS, respectively. Halliburton's satisfaction ratings in the category have shown the greatest improvement since 2005. When the analysis is expanded to include other downhole drilling products such as motors and rotary steerable systems, Smith International, Scientific Drilling and Baker Hughes emerge as ratings leaders.

Disclosure: no positions in any stocks mentioned.

Comments

[Turninrite:]

Just keep a couple of points to keep in mind regarding drill bits:

1. They are only one product line and may not have a major impact on overall company performance even if they are crushing the competition.

2. The more you improve your bit, the fewer you sell. Customers want superior performance and a lower price. It's an old, challenging game with potentially diminishing returns for the winner.

Feb 10 06:44 AM

[Doug Sheridan:]

Hi Turninrite,

Given your handle, I suspect you are in the oil and gas industry. As author of the original article on drill bits, I wanted to respond to your comments.

True, drill bits are just a portion of sales for each of the four major bit manufacturers. However, they are much-focused upon (and touted) pieces of equipment because of the direct impact they can have on the overall cost of a well. Most customers look at the "cost" of a drill bit as the base price of the bit plus the additional amount they save (or pay) in day-rate for the rig, crews, etc. as a result of the bit’s performance (or non-performance). For example, if a bit's price is 2X but saves 4X in rig and crew costs, that's a "superior" bit compared to one that costs 1X but does not save anything at all in terms of rig or crew costs.

In addition, one of the points of the orginal article was that the new computer-aided design and simulation being utilized by today's bit suppliers does appear to be very well received by customers -- so much so, that we suspect it might represent a potential next wave of product and service design in certain areas of the oilfield. If some manufacturers want to sell bits that don't last as long as their competitors (so they can sell more "replacement" bits in the short term), they do so at their own risk. The U.S. auto makers applied that kind of myopic thinking in the 70's and 80's, and now they trail the Japanese in quality, earnings and market share. Bit manufacturers clearly need to design, manufacture and service the very best products they can; to do otherwise is to place themselves on a very, very slippery slope in the longer term.

Feb 10 06:55 PM

[Oilfield:]

Yes I agree

But how long does it take for the driller to find out if the bit is going to last. A driller is going to want to go with what has worked for them in the past. If it has worked good they are going to want to use that. If they use something different and it breaks and they have to wait for the new bit. They will lose a lot of money and possibility their job

Feb 23 12:40 PM