Satisfied Customers, Investor Rewards

Includes: CLB, DRQ, HP, LUFK, NE, NR, RDC
by: Doug Sheridan

The evidence that customer satisfaction deserves full consideration as a key metric for understanding, managing and anticipating the performance of today's global oilfield suppliers continues to mount.

Satisfied Customers, Investor Rewards

Recently completed analysis indicates the strongest ties yet (statistical significance levels are now well over 95%) between publicly traded oilfield suppliers' customer satisfaction levels as measured in EnergyPoint Research's independent surveys and the subsequent stock-price performance of these same companies.

Based on the slope of the plotted historical relationship (see below), a 1-point improvement or advantage in a company's customer satisfaction rating has, on average, equated to excess or enhanced stock-price returns of 18.3 percentage points over the following 24 months.

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In more practical terms, since EnergyPoint conducted its first survey over eight years ago, U.S.-listed publicly traded oilfield suppliers rating in the top halves and top quartiles of their peer groups have, on average, seen their 24-month stock-prices outperform those of their peers by 18.9 and 9.2 percentage points, respectively. Companies rating in the bottom halves and bottom quartiles of these same surveys saw their stock prices underperform the peer-group mean by 12.8 and 7.9 percentage points.

This means that companies ranking in the top quartiles and top halves in terms of customer satisfaction have seen their average 24-month stock-price performance exceed that of companies in the bottom quartiles and bottom halves by an eye-popping 17.1 and 31.7 percentage points, respectively, since 2004.

We also note that positive relationships between companies' ratings and stock-price returns exist in each of the four upstream segments EnergyPoint tracks.

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The Ties That Bind

So, what's at work here? In short, oilfield suppliers rating well in terms of customer satisfaction tend to benefit from more loyal customers, higher levels of positive word-of-mouth and referrals, and stronger brand names in the marketplace. They are also more likely to win attractive pricing and contract terms, including more long-term commitments, from customers.

On the expense side, highly ranked suppliers enjoy lower customer-acquisition costs resulting from reduced churn rates and higher levels of referrals. Lower costs are also derived from more effective planning, employee training and execution due to the enhanced visibility associated with more stable and committed customer and employee bases.

This virtuous set of dynamics helps explain why the seven publicly traded companies that have continually ranked in the top half of EnergyPoint's surveys since the firm began conducting its studies in 2004 -- Core Laboratories (CLB), Dril-Quip (DRQ), Helmerich & Payne (HP), Lufkin Industries (LUFK), Noble Corp (NE), Newpark Resources (NR) and Rowan Companies (RDC) -- have, on average, seen their stock prices appreciate 460% over this period.

This compares to an average return of 185% for the eight publicly traded companies that have ranked in the bottom half across the same surveys and time periods.

A Final Remark

Since 2004, a single publicly traded company ranking in the top quartile of EnergyPoint's surveys has had a 70.4% chance of its stock price outperforming the peer-group mean over the next 24-months. The probability of outperformance grew to 83.3% for the average or "portfolio" return across all companies within the top quartile (or top half) of a given survey.

To be sure, the results presented here are immensely compelling. But they are especially gripping given how many industry participants and observers still view customer satisfaction as too old-fashioned, or even Pollyannaish, to matter. One can only assume that at least some will now reconsider.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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