Energy Equipment and Services: A Defensive-Growth Play in a Divergent Economy

The U.S. service sector, a cornerstone of post-pandemic economic growth, has entered a prolonged slump. The Richmond Services Index, a barometer of service-sector health, hit a historic low of 2 in July 2025, far below its 30-year average of 6.13. Employment in the sector stagnated, with hiring expectations at a meager 25, and margins compressed as demand waned. This divergence from the industrial and energy sectors—where demand is rebounding—has created a unique opportunity for investors to pivot toward sectors that thrive in high-interest-rate environments and structural tailwinds.

The Energy Equipment and Services (EES) sector, long dismissed as cyclical and volatile, has emerged as a compelling defensive-growth play. Unlike consumer-driven services, EES firms are insulated from wage stagnation and margin compression. Their resilience stems from three pillars: operational efficiency, strategic innovation, and alignment with energy transition.

Operational Efficiency: The New Normal

Leading EES firms have slashed costs and improved margins through aggressive restructuring. Schlumberger, for instance, achieved $75 million in annualized savings via cost-cutting programs, while Halliburton reduced capital expenditures per barrel by 25% using AI-driven drilling analytics. These measures have stabilized cash flows even as upstream oil and gas spending softens.

Consider Schlumberger's Q2 2025 results: Despite a 6% year-on-year revenue decline, adjusted EBITDA held steady at $2.05 billion, and free cash flow reached $622 million. The company's Production Systems division, which designs equipment for oil and gas extraction, saw its 17th consecutive quarter of year-on-year revenue growth, underscoring the sector's shift toward high-margin, less cyclical segments.

Strategic Innovation: Beyond Fossil Fuels

EES firms are no longer tethered to traditional oil and gas cycles. Schlumberger's acquisition of ChampionX in July 2025 expanded its footprint in production and recovery markets, while its Sequestri™ carbon storage solution positions it for long-term energy transition demand. Similarly, Halliburton's closed-loop completions technology with Chevron and NOV Inc.'s automated drilling systems in Oman highlight the sector's pivot toward digital and low-carbon solutions.

These innovations are not just incremental—they are structural. The EES sector's exposure to hydrogen production, carbon capture, and supercritical CO₂ technologies is creating new revenue streams that decouple from oil prices. For example, Schlumberger's collaboration with Air Products on clean hydrogen projects taps into a $300 billion global market expected to grow at 8% annually through 2030.

Valuation and Policy Tailwinds

The EES sector's defensive-growth appeal is further amplified by attractive valuations. The WisdomTree Global Value Portfolio, which allocates 25.9% to industrials and 18.9% to EES-related assets, trades at a forward P/E of 13.3x and a P/B of 1.9x—well below the S&P 500's 22x and 3.5x. This discount reflects underappreciated resilience in a sector often overshadowed by tech and consumer stocks.

Policy tailwinds also favor EES. Federal infrastructure bills and private-sector decarbonization efforts are driving demand for energy services, while tariffs on steel imports have strengthened pricing power for EES firms. Schlumberger's recent $0.285 quarterly dividend and NOV Inc.'s 3.06% yield further enhance the sector's appeal as a capital-preserving play.

Risks and Considerations

While the EES sector offers compelling upside, risks persist. Macroeconomic volatility, regulatory shifts, and competition in green energy markets could pressure margins. For instance, NOV Inc.'s Q2 2025 revenue grew 4% sequentially but fell 1% year-on-year, reflecting uneven demand across geographies. Investors should prioritize firms with diversified geographies, strong balance sheets, and clear energy transition strategies.

Conclusion: A Sector for the Long Haul

The EES sector's ability to adapt to weak service-sector conditions while capitalizing on industrial demand and energy transition makes it a standout defensive-growth opportunity. With valuations at a discount, robust cash flows, and alignment with structural trends, EES firms like Schlumberger, Halliburton, and NOV Inc. are well-positioned to outperform in a macroeconomic environment defined by high rates and divergent sector performance. For investors seeking resilience amid uncertainty, the EES sector offers a rare combination of stability and long-term growth.