Key points:
- Enteq is in oil services, so a 26% fall tells us about drilling activity, right?
- Not so fast, NTQ's fall could be about competition in drilling services
- Data is good but it's how we process it which turns it into useful information
Enteq Technologies (LON: NTQ) shares are down 26% this morning (32% by now) on the back of their AGM statement. Given how lightly traded NTQ shares are this might not be of great interest to that many traders – but that would be a mistake. For what happens in the oil services business – where Enteq is based – feeds through, in time, to the oil business itself. That oil services business being the precursor to the output of the swing oil producer these days, the American fracking industry. This could sound a little odd for we usually look to macroeconomic factors to try to work out the effect – the microeconomic effect – upon specific companies and here we're reversing that. But it is a valid approach all the same.
The specific point here is that yes, the oil price has been high recently. That we know. We would expect that to increase drilling activity. At which point, well, sorta. Because big oil fields take decades to come into play. No one's going to drill the arctic, or not drill it, dependent upon a 6 month change in oil prices. This is why, traditionally, oil supply was thought of as static in the short and medium terms, oil prices having to carry the weight of changes in demand. As an economist would say, inelastic supply.
What has changed this is that these days the swing producer is more the American fracking industry than anything the oil majors are doing. A fracked well might come online in months, so how many fracking wells are being drilled gives a good idea of extra supply about to arrive. This makes oil supply much more “elastic” in those economic jargon terms and so should moderate price swings.
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All of this means that the Baker Hughes rig count is an important predictor of oil prices off into the future. How many news wells are being drilled?
With this set up we can then look at Enteq Technologies and their problems and start to think that drilling must be declining, therefore oil might well go up. For Enteq is in that intermediate layer of providing services to those running oil drilling rigs. But that's to grasp the wrong lesson here. For what Enteq is actually saying is that oil rig activity is – as with the Baker Hughes numbers – up strongly on a year ago. What's up more than that is competition from other companies offering the same intermediate layer services and so there's significant margin erosion.
So, our logic goes – look at rig counts and the oil services market to see what oil supply might be like. Enteq reports a softening market, we should expect oil drilling to be declining. But the actual message here is not that – activity is increasing. What's hurting NTQ is competition, which is an entirely different message.
The lesson from which is that yes, there're vast oceans of information out there we can use to determine trading strategies. But it's vital that we understand the details of that information – without understanding it's just data, not the same thing at all.
So, Enteq seeing declining margins is a lesson for us to be wary of other oil services firms, rather than a commentary upon oil drilling activity. There's increased competition in the oil services market, not reduced activity in drilling. That is, we've got to process the data properly to extract the relevant information.