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.

Baker Hughes’ (BHI) announced acquisition of BJ Services (BJS) is all about BJ Services’ pressure pumping business. Apparently, Baker Hughes has decided the lack of such services represents a material hole in its portfolio, especially given the fact both the financial and oilfield markets view Baker Hughes as a primary competitor of highly integrated Halliburton and Schlumberger – both of which provide pressure pumping services globally.

There’s also an argument that Baker Hughes’ lack of pressure pumping (and possibly other services) has contributed to its less-than-stellar record as of late when it comes to winning integrated project management contracts (IPM). IPM contacts have been in the news as of late as Schlumberger (SLB), Weatherford (WFT) and Halliburton (HAL) have all won contracts of these types.

The pursuit of growth appears almost irrevocably embedded in the organizational DNA of Weatherford International (WFT). Whether through acquisition or organic means, the company seems forever intent on expanding its scope, scale and market share in the global oilfield.

Accordingly, revenues rose an astonishing 271% over the five years ending 2008, almost two-and-a-half times the average growth recorded by its competitors Baker Hughes (BHI), BJ Services (BJS), Halliburton (HAL), Smith International (SII) and Schlumberger (SLB) over the same period.

Reading through Gardner Denver’s (GDI) 2008 annual report recently, we noticed something worth mentioning. In the first 23 pages of the report –- i.e., the glossy portion of the report that includes the CEO’s letter to readers and a discussion of the company’s culture and its plans for the future –- the word “customer” was used a total of 56 times by our count. That’s twice per page. Moreover, of these mentions, over 40% were in the CEO’s letter.

So why do we believe this is significant? It’s simple. Our experience is that companies that willingly and whole-heartedly place customers at the center of their stated strategies tend to in fact register greater customer satisfaction and loyalty over time. Essentially, by upping the bar on themselves, they in effect leave left less room for underperformance, excuses and self-denial.

A Need for Better Performance

Few things can sour a relationship faster than watching wellsite operations that cost tens, or even hundreds, of thousands of dollars a day grind to a halt due to poorly performing rigs and/or rig-related equipment. As a result, both oilfield operators and suppliers pay considerable attention to the assortment of equipment comprising the rigs that they contract or own.

All things being equal, it’s always better to have the winds of history at your back than in your face. For the most part, history should be on the side of Precision Drilling (PDS), even in these darker days of the oil patch. The company’s reputation as a capable drilling contractor and oilfield supplier –- a standing corroborated in independent customer satisfaction surveys conducted by EnergyPoint Research going back to 2004 –- will likely prove advantageous as it, like all North American land drillers, attempts to navigate what is almost certain to be a seller’s market for the foreseeable future. Put simply, because customers are more inclined to work with contactors that have effectively met their needs in the past, Precision’s likely got a step up on peers such as Nabors Industries (NBR) and Patterson-UTI (PTEN).

So, what exactly are Precision’s strengths? According to our data, the company is especially well regarded for its ability to complete jobs on schedule and as specified. The quality and reliability of its field personnel also stands out. That said, management has its work cut out for it going forward. In its 28-page 2nd Quarter 2009 earnings release (yes, you read that right… the company’s quarterly press release was 28 pages long!!), Precision reported an average 77 drilling rigs as working during the quarter. With a fleet of 388, this equates to an unusually paltry utilization of 19.8%. This is down from 167 working rigs and a 43.0% utilization in the prior quarter, with the declines driven by spring break-up in Canada and overall weak demand.

To the casual observer, M-I SWACO might appear to be just another oilfield supplier fixated more on market share than on quality. A 60-40 JV between Smith International (SII) and Schlumberger (SLB), the provider of drilling fluids, systems and tools might also seem susceptible to identity issues.

Yet, data from EnergyPoint Research’s independent customer satisfaction ratings suggests nothing of the sort. In fact, our results show the company to be a customer satisfaction leader in its mainstay drilling fluids business.

The road to acceptance by the oil and gas industry of even the most innovative and compelling technology can be long, winding and arduous. This is especially the case if the technology seeks to supplant a more conventional way of operating that has heretofore “gotten the job” done in seemingly adequate fashion.

Take for example the plight of Tesco’s (TESO) drilling-with-casing and casing-drive technologies. Both are viewed by many industry observers as possessing the potential to revolutionize the way wells are drilled and casing is installed in the oilfield. Yet, widespread uptake of these technologies by the industry has remained relatively elusive.

EnergyPoint Research has collected customer satisfaction ratings on Diamond Offshore (DO) and other major offshore drillers since 2004. These ratings reflect information gathered from hundreds of confidential supplier evaluations via EnergyPoint’s independent and industry-wide surveys.

For the period 2004 through Q1 2009, DO has rated last among major offshore drilling contractors in terms of respondents’ overall satisfaction. DO ratings reflect the opinions of 48 total evaluations, most of which by respondents characterizing themselves as primary decision-makers or contributors to the process of selecting suppliers within their companies. Approximately two-thirds of evaluations were from respondents at supermajors, majors or national oil companies.

Knowing the Hole

It can be a tricky and involved question: Are there hydrocarbons down there, and if so, in what locations, quantities, forms and environments? Answering these and related questions with greater certainty, and at lower cost, has been an ongoing mission of providers of formation and well evaluation services since the oil and gas industry’s earliest days. Of course, the requirements of today’s upstream customers go considerably beyond those of past eras. The industry is now being forced to seek, and attempting to extract, ever-smaller deposits that are increasingly held in complex, unconventional, or otherwise poorly understood geologic formations. Consequently, the need for greater reliability, precision and availability of downhole data, and the equipment and trained personnel to gather and interpret such data, remains a central focus of operators.

When EnergyPoint Research published results from its first oilfield customer satisfaction survey back in 2004, Key Energy Services (KEG) was an organization seemingly on the brink -- and EnergyPoint’s survey results reflected just that. To be sure, the picture was not a pretty one as the 2004 survey showed the company finishing dead last among the 24 oilfield service companies rated. And here’s what one 2004 evaluator of Key shared about the company:

The last several years were, without a doubt, heady times for the oil and gas industry. Oilfield suppliers in particular enjoyed a kind of prosperity that even many industry old-timers regarded as nothing short of extraordinary. But growth in demand, and the challenges of serving that growth, clearly took a toll on the service and performance customers received from their suppliers during the period. In fact, EnergyPoint Research’s Oilfield Customer Satisfaction Index fell significantly beginning in 2004, hitting its all-time low in mid-2008. Ironically, although not surprisingly, this low-point in customer satisfaction came at the same time the Philadelphia Oil Service Index (OSX) reached its historic peak.

Despite enjoying some recent recovery, oilfield supplier customer satisfaction scores still remain conspicuously low. Comparison with other products and services in the broader economy — as measured by the American Customer Satisfaction Index — suggests oilfield suppliers’ aggregate ratings currently rank somewhere between those of commercial airlines and the U.S. Postal Service, organizations few consider to be champions of the customer cause.

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

Granted, success in the oil and gas business is usually better measured over the long term rather than the here and now. Yet, we also believe in acknowledging excellence based on short-term performance when warranted.

Core Laboratories (CLB) is one company in the oilfield that is has been performing on both counts. The supplier of reservoir description/management and production enhancement services recently reported its most profitable quarter in its 72-year history. This is not particularly surprising to us given the company's strong performance in EnergyPoint Research's independent customer satisfaction surveys over the past few years.

Ensco International (ESV) discussed its 3rd Qtr 2008 financial results recently, with expectations and opportunities for business as usual generally the theme for the Dallas, Texas based offshore drilling contractor. As followers of EnergyPoint Research's independent ratings are aware, Ensco experienced a favorable ratings swing in our last comprehensive drilling and wellsite contractors survey conducted in 2006. The ratings improvement was due in part to increased dialogue with customers and the institution of a more formalized program to survey and actively address customers' needs.

In terms of its current performance, preliminary results from EnergyPoint's ongoing 2008 / 09 survey show the company receiving generally healthy marks from respondents so far. These ratings predominately reflect Ensco's jackup operations. Ensco management eventually sees its growing deepwater fleet accounting for approximately one-third of the company's revenue (notable given Ensco's considerable history as a shelf operator). While our deepwater data on Ensco at this point are relatively limited, the indications so far suggest the company's talents do extend beyond the shallow ocean waters.

One of the most coveted feathers a company can have in its competitive bonnet is the willingness of customers to recommend its products and services to others. Not only are fulsome testimonials cost efficient and effective forms of promotion, they are also indications of customers’ inclinations to remain loyal over time.

Yet, despite the clear benefits, many of today’s oilfield suppliers fall short in generating any kind of palpable enthusiasm toward their products and services on the part of clientèle, in part because suppliers fail to understand the ingredients needed to engender real customer devotion. EnergyPoint Research's data consistently show that performance in the area of service and professionalism — generally defined in our surveys as the flexibility, responsiveness, and accountability a supplier shows toward its customers — typically trumps such factors as technological prowess and geographic reach in determining whether customers stick with suppliers.

Quick, name a company in the oilfield that:

1. is rich in history;
2. works as a drilling contractor and project manager for some of the industry's largest and most high-profile operators;
3. owns both land and offshore drilling assets, plus a profitable tool rental outfit;
4. operates in disparate regions across the globe, yet;
5. registered revenues in 2007 that were less than 10% of what Transocean (RIG) and Nabors Industries (NBR) recorded on a combined basis.

If you're stumped, don't beat yourself up. With 28 land rigs and 18 offshore barges scattered across the globe, Parker Drilling (PKD) has been flying under a lot of people's radars. In fact, despite announcing 2Q 2008 results recently that were up 34% from the year-ago period, market observers mustered little more than a collective yawn.

Some companies can't get a break. On the same day Patterson-UTI (PTEN) announced second quarter 2008 earnings that were generally in-line with analysts' expectations plus plans for 20 newbuild rigs substantially supported by expected three-year term contracts, Helmerich & Payne (HP) announced better-than-expected earnings plus a comparable number of advanced newbuilds fully supported by already-executed three-year contracts.

Whether or not this constitutes an official eclipsing of PTEN's news by HP is not for us to say. However, the timing and nature of the two companies' announcements at the very least underscores the fact that progress in the oilfield business is both a relative notion and a moving target.

At EnergyPoint Research, we pay as much attention to the trends within our data as we do to the data points themselves. And it's nice when we come across a high-profile industry supplier meeting the needs of customers more effectively today than in the past.

Such is the tale of Cameron International (CAM), whose customer satisfaction ratings in our independent surveys have risen steadily since 2005. Our most recent update from 2Q 2008 suggests particular progress in the performance and reliability of CAM's equipment, along with the quality of its personnel. This is good news for both the company and customers, and no small feat given industry-wide trends. It also likely has something to do with CAM's ability to report better-than-expected 2Q 2008 earnings.

For several quarters now, BJ Services' (BJS) plight has been the subject of much discussion – even gnashing of teeth – in financial circles as the company's stock price remained stagnant while the benchmark Philadelphia Oil Service Index [OSX] soared over the same time period. Nagging overcapacity issues underlying the company's core domestic pressure pumping business have apparently just been too much for investors to swallow.

While the quarterly financial results announced by BJS this week seem to suggest the company is benefiting from renewed strength in demand for its domestic pressure pumping services, its customer satisfaction scores in EnergyPoint Research's latest independent survey suggest the company is likely benefiting from something more than just a cyclical jump in demand.