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Investment Overview for Schlumberger Limited (NYSE:SLB)
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Below are the key drivers of Schlumberger's value that present opportunities for upside or downside to the current ${trefisprice}:
Middle East and Asia
- Middle East / Asia EBITDA Margins: The EBITDA margins for Schlumberger from its oil services operations in the Middle East / Asia region have historically been the highest among all its operational regions. We expect the declining trend in the margins to reverse as the recovery in the exploration and production services sector takes hold in the Middle East and in Asia. We expect EBITDA margins for Schlumberger to increase to 37-38% towards the end of the Trefis forecast period. Increasing margins will be driven by the demand for high technology products and services and the growing project and operational complexity of upstream exploration and production. We also expect synergies from Schlumberger's acquisition of Smith and Geoservices to have a positive impact on margins. If Schlumberger is able to harness synergies with Smith and improve its pricing through the up-cycle to increase EBITDA margins in the region to 45% as compared to our estimate of 37% at the end of the Trefis forecast period, this would provide a 6% upside to our price estimate for Schlumberger's stock. On the other hand if margins in the Middle East and Asia fall due to competitive pricing pressures to 26% by the end of the forecast by the end of the Trefis forecast period, there could be an 8% downside to our price estimate.
- Rig Count in Middle East / Asia: The total rig count in the Middle East and Asia has rebounded from a low of 495 in 2009 to 549 rigs in 2011. We expect this number to continue to increase by 3-4% annually going forward. The increased rig count is a result of the surge in upstream exploration activity for oil, gas and exploration for unconventional hydrocarbons such as shale gas picking up in India and China. Upstream exploration is directly linked to the price of oil and gas as investments are linked to the cash flows of producers such as Exxon Mobil and Shell. Should exploration efforts in the Middle East and Asia pick up as a result of a surge in oil and gas prices to the point that the rig count increases to 900 (or approximately 25% more than our estimate) by the end of the Trefis forecast period, there could be an upside of 7% to our price estimate for Schlumberger's stock.
For additional details, select a driver above or select a division from the interactive Trefis split for Schlumberger at the top of the page.
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Schlumberger provides upstream reservoir characterization and drilling and exploration services for the oil and gas industry which are required by firms such as Exxon Mobil and National Oil Companies (NOCs) like Saudi Aramco to explore, develop and service their oil resources. The company has an extensive geographical reach, conducting business in over 80 countries and providing products and services for oil and gas exploration including seismic services, drilling and post-drilling services.
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We believe the Middle East / Asia and the North America divisions of Schlumberger are more valuable than the other geographical divisions primarily because of
Large market for exploration and production services in North America
North America accounts for approximately 60% of the total rig count published by Baker Hughes. While the Revenue per Rig is the lowest in this region, the size of the market in terms of the number of rigs exceeds the combined size of the other three geographic divisions of Latin America, Europe / CIS / Africa and the Middle East / Asia.
High margins in Middle East / Asia
The Middle East and Asia region was the largest contributor to Schlumberger's earnings in 2010 and 2009 despite having lower revenues than the North America division. Schlumberger's ability to command such high margins in this region contributes significantly to its overall stock price. In the long term this region will continue to grow in importance as reserves in the OPEC region serve an increasingly large share of the global oil demand.
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Exploration of deepwater and other remote sources of oil and gas
Increasingly over the past few years, major oil and gas finds have been in deepwater and other remote locations such as the CIS and Iraq. The exploitation of these sources adds tremendous logistical and technical complexities to the exploration projects that translate into higher revenues and lower competition for upstream products and services firms such as Schlumberger.
Marginal reduction in the number and size of new finds
The IEA estimates that non-OPEC oil production peaked in 2010. This means that future oil and gas finds will get increasingly rarer and the size of the discoveries will decline which will lead to higher exploration and drilling costs to maintain historical output levels of oil.
Oversupply of natural gas in North America
Natural gas prices continue to remain suppressed because of the perceived high storage levels and the oversupply of gas in the market. The lagging demand will translate into lower investments in natural gas exploration in the short term.
New oil and gas discoveries in Brazil and other Latin American countries
Several of the largest oil and gas discoveries of the past five years have been in Latin America, including several multibillion barrel offshore finds in Brazil. These discoveries are attracting investments from local oil companies such as Petrobas as well as foreign oil majors such as Chevron and Petrochina. Exploration in this region is expected to improve Schlumberger's revenue and profit outlook in the region
Exploration for unconventional sources in Europe, Latin America, the Middle East and Asia
Exploration for unconventional sources such as shale and tight gas are expected to pick up in Argentina, Mexico, Poland, China and Saudi Arabia over the next 1-5 years resulting in higher revenues and operating profits for Schlumberger in these regions.
Industry consolidation and higher service intensity in North America
The recent downturn has resulted in the consolidation of upstream products and the services industry in North America as many smaller players failed to survive the competitive pricing by established players such as Schlumberger. In addition to this, the shift towards unconventional activity and higher services intensity favors larger players which should result in better pricing for Schlumberger.
Efforts to arrest decline rates in ageing fields
Oil firms are investing in technology to help them reduce the decline rates seen in major fields over their lifetime. Pemex has been engaged in efforts to arrest the decline in its Canterall fields while Saudi Aramco has also made it a priority to reduce the decline in its fields at 2-3% per annum.
Trefis Forecast Rationale for Annual Average Rig Count in Europe Africa and the CIS
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The rig count is the annual average of the weekly count of the number of operational rigs in the region as reported by Baker Hughes. Baker Hughes provides rig count information in Europe and Asia. For the rig count from the CIS region we have obtained this information from MI-SWACO.
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Global oil and gas exploration is driven by oil & gas prices. The rig count in Europe and Africa and the CIS touched 1,010 in 2008 as oil prices reached record levels. In 2009 as oil prices declined drastically the the average rig count reached 852 in 2009 before recovering to 1170 in 2010. The rig count increased in 2011 to 1280. Since MI-SWACO has not published CIS rig count data for 2012, we have estimated the value for this year using the historical growth rate in the CIS rig count and added it to the reported figures for Europe and Africa. We estimate the 2012 ${forecast} to be around 1410 units.
The rig count gives a strong indication of investments in upstream activity. As oil prices reached record levels in 2008 nearly $500 billion were poured into the sector resulting in many new rigs coming into operation as it became economically viable to exploit remote resources. As oil prices declined due to the recession, investments were cut by around 19% in 2009 from $524 billion in 2008 to $442 billion in 2009 (IEA). Nearly 20 upstream large scale projects with a capacity of 2 mb/d and 9 bcm of gas output were put on hold from October 2008. However with the economic recovery taking hold, there was a strong rebound in demand for oil with demand surging by 2.8 mb/d in 2010. In 2011 the average demand increase from the three principal forecasting agencies (IEA,EIA and CERA) is for an additional 1.4 mb/d which is expected to keep oil prices from falling.
We expect the ${forecast} to grow at about 4% annually during the remainder of the Trefis forecast period.
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- Expected exploration and production expansion in Africa
- The IEA expects production to rise in Nigeria, Algeria, Egypt and Libya despite the uncertain investment environment in these countries.
- Exploration is expected to pick up in Angola which happens to be Africa’s 3rd largest producer of oil. Increased activity is also expected in other African countries such as Ghana and Guinea.
- Growing need for upstream explorations
- The IEA forecasts that upstream exploration should see annual investments of around $450 billion till 2030 for supply to keep pace with the growth in demand.
- It is estimated that approximately 50% of the conventional oil production needed by 2020 is yet to developed or discovered. By 2035 this figure is expected to increase to 70% indicating tremendous upside potential for exploration products and the services industry which in turn will boost rig count.
- Growing market for natural gas
- The IEA estimates annual global investments of $132 billion per annum over the next 20 years to develop and maintain gas resources.
- In the long term, IEA projections indicate that the demand for gas will increase by 1.4 - 1.6% per annum till 2035. Other forecasts estimate annual growth rates of around 2.0% with non-OECD economies contributing the most to that growth.
- Following the Japan nuclear crisis, countries may opt for an energy mix that would bolster demand for natural gas further increasing the rig count.
- Rig count in the CIS is expected to increase
- Gazprom - Russia's largest oil and gas producer - aims to double its oil production by 2020.
- Gazprom will also add an expected 270 bcm gas production capacity in Yamal, Shtokman and Nadym-Pur-Taz by 2020.
- Offshore exploration projects are also expected in the Azerbaijan sector of the Caspian Sea and Kazakhstan.
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- Aging oil fields in the North Sea
- The number of fields in Europe is expected to decline slightly as the ageing fields in the North Sea are retired as it becomes nonviable to operate them despite rising oil prices.
- The uncertain investment environment in Africa
- Oil and gas exploration and expansion requires billions of dollars of investments and consequentially investing companies seek to minimize investment risks.
- Countries such as Nigeria, Algeria, Egypt and Libya are seeing political upheavals that greatly add to the political risks projects in these countries. This level of uncertainty can reduce investments in exploration.
- Weak short term global demand and pricing of natural gas
- Global gas demand fell 2.1% in 2009 resulting in weak pricing which in turn impacted exploration efforts.
- The IEA expects low natural gas prices to hurt investments in gas exploration in the short term.
- Demand for natural gas is estimated to be stagnant in 2011 at 66.2 billion cubic feet/day.
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Who came up with the Trefis forecast for future years?
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How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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