Oilfield Ratings Point the Way

Like most corners of the business world, the oilfield supply sector is currently searching for ways to improve its circumstances. The intoxicating blend of easy money, robust economic growth and over-heated commodity prices that fueled record profits not long ago are now gone. In their place is a recessed combination of tight credit markets, slower growth prospects and materially lower commodity price expectations.

Clearly, it’s a more competitive world these days. The intense sellers’ market that existed during the last upcycle has all but evaporated in most, if not all, major segments of the oil and gas industry. Along the way, much of the vast inventory of new and replacement customers, markets and projects that oilfield suppliers had grown accustomed to essentially dried up. The cushion of significant excess demand that previously took the industry to new heights has simply, and remarkably, vanished.

PATH TO PERFORMANCE

In recognition of what some are now calling the industry’s new normal, many suppliers are recasting their sights and attention toward their clients. As evidence, industry-wide customer satisfaction via our independent surveys, after hitting bottom in the second quarter of 2008, has risen three out the last four quarters.

This is good news. Suppliers will undoubtedly emerge as better, more competitive organizations due to this renewed, if not newfound, emphasis on customers. They will also enjoy greater confidence, purpose and direction as they navigate the remaining throes of this difficult down cycle.

And be sure, investors are taking note of suppliers’ standings in the market place. Consider Core Laboratories (CLB), Helmerich & Payne (HP) , Lufkin Industries (LUFK) and Noble Drilling (NE) — four publicly traded suppliers that have regularly placed in the top quartile of our independent customer satisfaction surveys.

Since 2004, when we first began compiling data, the stock prices of these standout companies have risen a remarkable 211.7% on average (the industry-wide return over the same period as measured by the Philadelphia Oil Services Index, or the OSX, was 71.5%).

Contrast these results with the average returns of Key Energy Services (KEG), Nabors Industries (NBR) , National Oilwell Varco (NOV) and Tetra Technologies (TTI), all companies that have placed in the bottom quartile in our surveys over the same period. For this group, the average stock price increase was a much more subdued 37.6%.

Note: Click on the following to read our most recent notes on each of the companies: CLB, HP, LUFK, NE, KEG, NBR and NOV.

PREPONDERANCE OF EVIDENCE

Indications of a correlation between customer satisfaction and investor returns have existed for years. A seminal study conducted by the University of Michigan’s Ross School of Business examined 10 years worth of data from the American Customer Satisfaction Index (ACSI) and found that investment portfolios based on customer satisfaction ratings delivered statistically significant excess returns in both up and down markets across a range of different industries.

Unfortunately, the ACSI does not furnish ratings concerning suppliers of products and services to the upstream oil and gas industry. However, utilizing customer satisfaction data collected via our surveys, we’ve conducted our own analysis. In the process, we uncovered some compelling findings.

In the 12 months after completion of our surveys, the average stock price return of suppliers ranking in the top half of a survey outperformed those in the bottom half by 10.5 percentage points. This outperformance grew to 12.2 percentage points when the observation period was expanded to 24 months. Even more striking, suppliers placing in the top quartile of the surveys outperformed the bottom quartile by 18.3 and 33.4 percentage points over the subsequent 12 and 24 months, respectively. Click here to view detailed calculations table.

Following are statistical test results estimating the probability the above findings reflect statistically significant differences rather than simple chance or coincidence.

Outperformance Over 12-Months:

• Top vs. Bottom Qtr +18.3% @ 94.8% Significance
• Top vs. Bottom Half +10.5% @ 91.2% Significance

Outperformance Over 24-Months:

• Top vs. Bottom Qtr +33.4% @ 98.5% Significance
• Top vs. Bottom Half +12.2% @ 77.1% Significance

Looking at it another way, on average since 2004, a one-half point increase in a supplier’s total satisfaction rating, based on our standard 10-pt scale, has correlated to an incremental positive 5.7% in stock price return over the subsequent 12 months after a survey and a positive 9.2% over the subsequent 24 months.

THE LOYALTY FACTOR

So, why do higher customer satisfaction levels tend to lead to outsized returns for shareholders? Research has shown that companies rating well with customers benefit in a number of ways — both financially and strategically. For one, satisfying and retaining customers is simply more efficient than constantly having to replace them. And where higher levels of customer satisfaction exist, customer loyalty tends to follow. Greater loyalty means customers are less likely to be lured away by competitors, even when prospects of lower prices are involved.

As a result, high performers dedicate fewer corporate resources to attracting and adapting to replacement customers. This allows for greater focus on the fundamentals of designing and delivering quality products and services that, in turn, enhance a company’s reputation, engenders affirmative testimonials in the market place, and leads to new business.

Offering additional support to the contention that higher customer satisfaction leads to greater client loyalty, we note that respondents to recent surveys who indicated their overall satisfaction with a supplier to be at top-quartile levels also indicated their intention to reuse that same supplier at rates almost 40% higher on average than for suppliers placing in the bottom-quartile. That’s big.

ENDURING RELEVANCE

The correlation between customer satisfaction and investor returns of publicly traded oilfield suppliers carries relevance for multiple stakeholders. For suppliers, it implies they have strong and lasting incentive to view customer satisfaction as a crucial component of competitive advantage. For customers, it is an indication that they continue, as a whole, to reward suppliers in proportion to how well their needs as customers are being met. And finally, for investors, it indicates a supplier’s customer satisfaction standing can have a material impact on its ability to generate excess returns for shareholders over time.

Note – The findings in this report are derived from over 9,700 customer evaluations of oilfield suppliers collected via EnergyPoint Research’s independent customer satisfaction surveys since 2004.

Disclosure: No positions

Comments

[somdbob:]

Does the alleged increase in drilling activity in the Bakken area of North Dakota have any measurable effect on the oilfield ratings.? There is mention there of a necessity to utilize 'horizontal' drilling in some Bakken areas. Hess Oil, I believe, has several wells there.

Sep 14 11:49 PM

[Doug Sheridan:]

Although activity in the Bakken could impact the ratings of certain suppliers that are active in that area, EnergyPoint's surveys are by design global in nature. As a result, the performance of an integrated supplier in any one basin will typically have a relatively limited impact on overall ratings. And the nature of that impact will be based on whether customers in that basin are more or less satisfied with a supplier than other customers of that same supplier in other basins. Suppliers that tend to rate better in our surveys in the area of horizonatal/directional drilling are Helmerich & Payne in drilling services (HP) and Smith (SII) International in bits. Baker Hughes (BHI) scores more toward the middle of the pack.

Sep 15 09:23 AM