A Look At Schlumberger’s Product Segments And Key Drivers

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Providing an array of  products and services has become critical in the oil field services space as customers seek contractors who can cater to the entire life cycle of a reservoir. Schlumberger (NYSE:SLB), the world’s largest oil field services company, has been gradually expanding its product portfolio, partly through a series of acquisitions and partnerships. In this article, we take a look at the firm’s major product lines as well as some of the factors that are driving their performance.

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The Market Leader In Reservoir Characterization

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The reservoir characterization group provides technologies for locating and defining hydrocarbon reserves. The division also holds the Western Geco segment which provides geophysical services including reservoir imaging, monitoring, and development services. Schlumberger is the industry leader in wireline services – its wireline business is almost 3 times the size of Hallibuton’s wireline business. Wireline helps to log data needed to evaluate well formations and assists in the well construction and production process. The company’s wireline revenues have grown from roughly $4 billion in 2010 to around $6 billion in 2012. [1] The wireline business could growth further as oil wells become deeper and also as more deepwater exploration is undertaken. For instance, between 2000 and 2008, the depth of an average U.S. oil well has increased from around 5000 feet to nearly 6000 feet.

Drilling Group Has Been Bolstered By Acquisitions

Schlumberger’s drilling segment is its largest division accounting for nearly 37% of overall revenues. [2] The division provides technologies for drilling and positioning oil and gas wells. Following the acquisition of Smith International, Schlumberger has also grown to become the market the leader in the drill bits space with the product accounting for around $1.5 billion in revenues. Schlumberger is also the industry leader in directional drilling services.

Directional drilling involves drilling wells at multiple angles to produce oil and gas and also allows access to several wells from the same well bore. Directional drilling revenues were around $4 billion last year (about 10% of total revenues) and we believe that it could see some upside going forward since the technology helps to minimize the environmental impact of drilling. [1] The acquisition of MI-SWACO has made Schlumberger a leader in drilling and completion fluids space as well. While most of the drilling segment’s growth in recent times has come through acquisitions, we believe that over the long term growth could also come organically as companies undertake exploration of  hydrocarbons located at greater depths and more challenging environments. This could also bolster the demand for drill bits and drilling fluids over time.

Production Group: Subsea Looks Promising, Pressure Pumping Will Continue To Face Headwinds

Schlumberger’s production group consists of technologies that are used over the production lifespan of oil and gas reservoirs and includes services for completions, production enhancement, artificial lift, production management and subsea services. The division accounts for around 35% of the company’s revenues. While production enhancement services like pressure pumping are the largest revenue drivers for the segment, in recent years, the company has been making a big push into the subsea technologies space.

Oil fields that lie under the ocean floor are broadly referred to as subsea reserves. Subsea production technologies are used to improve reservoir recovery rates, optimize production, minimize weather related downtime and are designed to work under challenging conditions. Schlumberger has viewed this as a significant growth opportunity. Around 200 new subsea fields are expected to become active in the next four years and around 11,000 subsea wells are expected to become operational worldwide by 2020. In 2011, Schlumberger acquired Framo Engineering, a Norwegian company with technologies focused on the subsea market and later forged a joint venture with Cameron International Corp (NYSE:CAM), a provider of subsea equipment, to jointly develop products, systems and services for the subsea oil and gas market. (Related Read: What The Cameron Subsea Deal Could Mean For Schlumberger)

The pressure pumping product line contributes around $10 billion to Schlumberger’s revenues. However, the business has been facing significant headwinds over the last few years as falling natural gas prices in the United States coupled with excess pressure pumping capacity have led to weaker pricing for services such as fracking. The prices for fracking services, which are used to stimulate shale gas and oil wells, fell by around 15% in the United States last year. The situation could remain challenging through 2013 as well since natural gas prices have been trending down, falling from over $4.20 per MMBtu in April to current levels of around $3.80. Additionally, U.S. gas drilling activity has continued to slump, with the gas rig count falling by nearly 20% since January.  While the pressure pumping business, particularly fracking, is largely concentrated in North America, opportunities are opening up in other countries such as China, the Middle East and Australia. (Related Read: Growing Chinese Shale Exploration Presents An Opportunity For Schlumberger)

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Notes:
  1. Howard Weil Oilfield Services Fact Book [] []
  2. Schlumberger SEC Filings []