Schlumberger Versus Halliburton: Who Is Operating More Efficiently?

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An obvious byproduct of any economic downturn is the cost efficiency that the companies in that industry strive to achieve to overcome the impact of the downturn. This is similar to the current situation in the oilfield services industry, where all the companies are consistently trying to generate operational efficiency to weather the ongoing commodity trough. The two largest oilfield services companies in the world, Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), have witnessed a notable decline in their profitability due to the plummeting commodity prices over the last two years. As a result, the oilfield contractors have been working towards controlling their operating costs to sustain their declining operating margins in this volatile price environment. Thus, in this article we aim to discuss the operational performance of the two companies in the past, and how we expect them to perform in the next five years.

Also read other articles of this series – Schlumberger Versus Halliburton: Who Has A Better Financial Position?Schlumberger Versus Halliburton: Who Is Delivering Better Returns?

As the oil and gas industry is facing one of its worst downturn, the majority of the oil and gas producers are seeking cost efficient technology and services that can enable them to optimize the production from their existing wells. This has created pricing pressure for the oilfield contractors, such as Schlumberger and Halliburton, who are forced to negotiate shorter contracts to sustain their top line. Since the outlook of the commodity markets remains bleak, we expect this trend to continue over the next few years. That is to say that although the number of rigs employed worldwide is expected to remain weak, the revenue per rig is likely to go up in the next couple of years.

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Based on historical data, Schlumberger earns almost twice as much revenue per rig than Halliburton in a majority of international operations. The only exception to this trend is North America, where Halliburton has a stronger holding than Schlumberger (Read: How Will Limited Exposure To North American Markets Impact Schlumberger’s Operating Profits?). Based on the above trend, and our oil price estimates, we forecast that Schlumberger will continue to deliver higher revenue per rig than Halliburton, particularly in the international markets, over the next five years. To add to this, the growth potential of the North American market can also enable the Houston-based company to start generating higher revenue per rig in North America, despite its lower presence in those markets.

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On analyzing the operating margins of the two companies, we understand that Schlumberger has historically delivered industry-leading EBITDA margins in all its international markets. While the company’s margins have suffered due to the downturn, the company has remained resilient in the weak oil price environment and continues to deliver positive margins in the majority of its international markets. On the contrary, Halliburton has continued to hold a competitive position only in its North American markets, while it has been struggling to sustain its margins in the international markets.

Keeping in mind the historical trend and the ongoing cost efficiency efforts, we expect by the two companies’  EBITDA margins to revert to their historical levels over the next few years. This would imply that Schlumberger will continue to dominate the international margins, while Halliburton will maintain an edge in the North American markets. (Read: How Will Halliburton’s Over Exposure To North American Markets Impact Its Profits?)

SLB-Q&A-4-1

From the discussion above, it is apparent that Schlumberger has held a firm ground in the ongoing commodity down cycle, and will be quick to recover when the commodity markets rebound. We expect the oilfield contractor to continue to hold its market leading position, particularly in the international markets. On the other hand, Halliburton has been negatively impacted by the depressed commodity prices over the last two years. However, the company’s strong presence in the North American markets will enable it to bounce back soon after the markets improve.

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