The measure of the competitive barrier, if any, that gives a company an advantage over its rivals and allows it to generate above-average returns on invested capital.
Four major types of economic moats are: high customer switching costs; economies of scale; intangible assets such as brands or patents; and the network effect.
Morningstar divides stocks into three categories according to moat size: wide moat (companies with the strongest competitive advantage); narrow moat (those with some competitive advantage); and no moat (those with no sustainable competitiveadvantage).
Schlumberger is one of the top firms in the oil services industry. In our view, the company is well-positioned to benefit from the industry's current weakness and future rebound, given its financial strength, geographical and product diversification, well-regarded research labs, and unique technology acquisition strategy. We believe the company's focus on building out a product set by making small software-oriented acquisitions to provide deeper insights into solving oil field issues will give it an edge over smaller peers when conditions improve. This strategy is geared toward winning large integrated project-management contracts with national oil companies (where Schlumberger excels), which offer ample opportunities to sell additional services from its wide-ranging portfolio … Still, as Schlumberger competes in many global markets, we believe it faces some risks. Political risk is always a concern when governments can destroy firms for political gain (as we've seen in Russia) or nationalize assets (as we've seen in Venezuela). Also, an inability to commercialize key technology could cost the firm project wins and reduce the impact of its heavy investment in its globalized workforce. Finally, we believe that recent cash-for-oil deals with Brazil and Russia could mean a larger Chinese oil services presence in the countries in the future. In our view, one of China's goals behind the deals is to secure larger roles for its oil services arms overseas, which will ultimately mean more competition for Schlumberger.
Halliburton's extensive oil field experience makes it a fierce competitor in the oil services industry. The company's managerial talent and international expertise is considerable, as it routinely wins high-profile contracts in key regions such as the Middle East. For more than a decade, Halliburton has been working on integrating its drilling services to fully optimize drilling performance while lowering costs. Halliburton began by placing its drilling engineering applications under one roof, which includes fluids, bits, and directional drilling. Over time, the firm has integrated its services into a single solution, which means that a customer can potentially obtain substantially greater well performance and reduced levels of non-productive time by standardizing on Halliburton's services rather than mixing services from multiple services providers ... but there are also threats involved with investing heavily in politically risky countries, such as Venezuela, Russia, and Libya. For example, Venezuela has nationalized several oil rigs and has made clear its intentions to source new service work from politically friendly nations like China instead of the U.S. Also, many countries delegate a large part of the country's services work from their state-owned oil and gas firms to local firms rather than U.S. firms. U.S. services firms typically hire local talent to better compete for contracts. The risk is that Halliburton's services expertise could be transferred to the local workers or other international services firms (and more critically, Chinese oil services companies) in the country over time, which could then create effective regional competitors.
Disclaimer: Please read and consider important information related to all communication made by Soos Global on Seeking Alpha by clicking here.