Pumping, Artificial Lift and Drilling Drive Schlumberger’s North American Land Business

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Upstream activity in the U.S. onshore market has been strong this year, driven by reasonably attractive commodity prices and increasing activity in the country’s key shale basins. Exploration and production spending in the U.S. is expected to grow by around 9.3% this year to about $300 billion, while the onshore well count is expected to rise by around 5%. [1] While Schlumberger (NYSE:SLB), the world’s largest oilfield services company, has typically focused on international markets (which account for about two-thirds of its revenue), it has been making an aggressive push to gain market share in the fast growing U.S. market. During Q2 2014, the company saw its North American revenues grow by around 16% year-over-year to about $3.9 billion. In comparison, Halliburton – the North American market leader  – and Baker Hughes saw their North American revenues grow by around 11% and 6% respectively.  In this note, we take a look at some of the key product lines that are driving Schlumberger’s growth in the United States and the broader North American market.

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Gaining Market Share In The Pressure Pumping Space

The pressure pumping markets have been steadily recovering from a two-year slump that was brought about by low gas prices and an oversupply of equipment. Although Schlumberger’s pressure pumping business – estimated to stand at around $7 billion in 2013 [2] – is smaller compared to Halliburton’s operations, the company has been seeing a strong uptake of late led by some market share gains, better operational efficiency and new technology introductions. The company was one of the first among the large oilfield services firms to deploy additional capacity, adding eight additional pressure pumping fleets over the past year. [3] The outlook for the pumping market looks positive, given that the horizontal rig count – a leading indicator of demand for unconventional well services such as hydraulic fracturing – touched an all time high of 1,333 last week. This could translate to more demand for pressure pumping services going forward.

Rod Lift Acquisitions Give Company A Better Hold Of Artificial Lift Market

Artificial lift equipment is used on oil wells to increase pressure within the reservoir and stimulate oil to flow onto the surface, resulting in higher production. [4] While Schlumberger is the second largest player in the artificial lift market globally, behind Weatherford International, it has been seeking to narrow the gap by expanding inorganically. Over the last year, the company acquired 12 firms specializing in rod lift technologies. While rod lifts are not very high-technology products, they are typically preferred for wells with low flow rates, and this could help Schlumberger provide lift solutions for wells in different stages of the life cycle. Additionally, given that rod lifts are among the the most widely used artificial lift methods in onshore operations in the United States, this could help the company cross-sell some of its other lift products such as electrical submersible pumps. Schlumberger could also possibly refine and improve rod lift technology, giving it a competitive advantage in the North American market.

Drilling Alliances

Schlumberger is the largest manufacturer of drill bits and is also the largest player, by far, in the directional drilling space. The company has been seeking to boost its land drilling product lines through a combination of new technology introductions, new business models and new alliances. For instance, the company entered into an alliance with contract driller Precision Drilling. Under the agreement, Schlumberger will provide Precision its downhole technologies (which are typically used to control and guide drill bits to drill horizontal wells) and equipment and would  also provide training for the Precision’s manpower. This should help the company further deploy its technologies into the North American land drilling market, without having to scale up its headcount or footprint.

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Notes:
  1. E&P Capital Spending to Rebound in North America, Oil and Gas Journal, March 2014 []
  2. Oilfield Services Factbook, Schlumberger, March 2014 []
  3. Schlumberger’s (SLB) CEO Paal Kibsgaard on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 []
  4. How Does Artificial Lift Work?, Rigzone []