The oil and gas equipment and servi

The oil and gas equipment and services industry is cyclical in nature—it is driven by drilling
activity, which in turn is influenced by oil and gas prices and recovery costs. Its cycles have
historically been long, with peaks and troughs further apart than those of other cyclical industries
have. The capital-intensive nature of the oil and gas equipment and services industry is a primary
factor for the relatively long cycles. Large expenditures are needed to build rigs, manufacture
products, and fund research and development (“R&D”) programs. These expenditures act as
effective barriers to entry, discouraging competitors from entering the business.
Oil and gas products and services follow the cyclicality of particular energy markets. For example,
drilling and evaluation, well installation, and well completion services depend on exploration and
development activity and the completion phase of the well life cycle. In contrast, production
optimization and artificial lift systems depend on production activity. Consequently, companies
providing products and services to the oil and gas industry are expected to perform well despite
depletion and production decline rates. In periods of high demand, the provision of services and
rental of equipment provide high day rates, which in turn increase the profitability of the individual
service providers and equipment owners. Conversely, in periods of low demand, services and
equipment providers are forced to lower day rates, which negatively affect the profitability of these
companies. Demand is influenced both on a global basis as well as individually on a regional and
country specific basis.
Oil and gas equipment and services companies need to have a full complement of tools and services
available in order to compete on a global scale, as international oil companies (“IOCs”) demand an
“all-in-one” package from its service providers. This means being able to provide tools at the
drilling, evaluation, intervention, production, and completion stages. While companies are seeking
to be total solution providers to oil and gas producers, offering a broad range of products and
services, competition in all phases of the oil and gas equipment and services industry has increased.
Medium and small oil service providers often specialize in providing only limited services such as
directional drilling, contract drilling, or wireline. Meanwhile, the major oil services providers such
as Halliburton Co. (“Halliburton”), Schlumberger Ltd. (“Schlumberger”), Baker Hughes, Inc. (“Baker
Hughes” or “BHI”), and Weatherford must provide the full complement of services, or otherwise
risk losing business to their major competitors. Major IOCs are interested in tendering integrated
service contracts, rather than single service contracts, to achieve economies of scale that can be
reached by offering a wide range of products and services. Thus, many of the oil service providers
may sell products and services separately or may bundle them together to provide integrated
solutions, up to and including integrated well construction, where a single oil service provider is
responsible for the entire process of drilling, constructing, and completing a well.
The industry offers many opportunities and challenges. The cyclicality of the energy industry
affects the demand for products and services. The cyclicality of the industry affects Weatherford’s
business directly. Certain Weatherford products and services, such as drilling and evaluation
services, well installation services and well completion services, depend on the level of exploration
and development activity in the industry as well as the completion phase of the well life cycle. Other
Weatherford products and services, such as production optimization and artificial lift systems, are
dependent on production activity in the industry.
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