A Boost in Saudi Oil Rig Count Brightens Outlook for Schlumberger

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The rig count in Saudi Arabia has doubled in January 2011 over the same period last year as the country prepares to take steps to boost production to stabilize oil markets in light of the sanctions on Iran. [1] Saudi Arabia, the world’s top exporter of crude oil, has shown a willingness to take measures to ease the situation as the U.S. and the E.U. take measures to cut dependence on Iranian oil.

The rig count in a geography is used as a proxy to estimate the oil and gas exploration and production (E&P) activity in the region. Schlumberger (NYSE:SLB) earns a major portion of its value from its operations in the Middle East and Asia. A boost in Saudi E&P activity could add upside to the company’s revenues from the region. Other oilfield services players like Halliburton (NYSE:HAL) also have operations in the region. We have a $100 price estimate for Schlumberger, which is at a 30% premium to its current market price.

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Crisis impact

According to some reports, Saudi Aramco is planning to bring its oldest field Dammam on line to meet demand for oil from countries looking to cut dependence on Iranian oil. [1] Countries such as India and South Korea, which are large buyers of Iranian oil have approached Saudi Arabia to increase supplies as new sanctions imposed by the U.S. take effect from June. Global oil prices have jumped in the past few weeks because of growing instability in the Middle East. The situation is exacerbated by the fact that significant capacity in Libya and Yemen is down because of local political conditions. Saudi Arabia is home to a bulk of the world’s spare production capacity and more drilling in the region is indicative that country may boost E&P activity to meet the surge in demand for its oil.

The rig count in Saudi Arabia peaked in August 2007 at 57 when rising global oil prices pushed the country to boost capacity to more than 12 million barrels / day (Mb/d). [1] Exploration activity in the region fell after crude prices fell following the global financial crisis. Schlumberger’s earnings in the region have followed these broad trends over the past few years. A boost in exploration in Saudi Arabia should have a positive impact Schlumberger’s results in the Middle east and Asia for the next few quarters.

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  1. Saudis Oil-Rig Use Soars as Obama Pressed on SPR Release: Energy Markets, Bloomberg [] [] []