Lower Rig Count in Asia Could Weigh on Schlumberger

Shares for oilfield services firms such as Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) have taken a hit over the past month as lower oil prices are expected to lower oil exploration and production (E&P) activity across the world. Since low oil prices impact the cash flows of oil companies and their ability to generate financing for E&P projects, a sustained drop in the price of oil and gas could impact the overall market for oilfield services that can be witnessed with a drop in rig count.

Baker Hughes has reported that the rig count in Asia has dropped by 10% in September over the same period last year indicating that oilfield services firms could take a small hit because of growing macroeconomic concerns. ^[1] Rigs in Asia account for just over 20% of global rigs in use.

Schlumberger’s operations in the Middle East and Asia constitutes 30% of our $107 price estimate for the stock. Other oilfield services firms such as Halliburton and Baker Hughes are less dependent on international market for their revenues.

Rig count declines

The active rig count is a good indicator of the demand for oilfield services in a given region. A growing rig count implies increasing utilization of rig services as well as a strong pricing environment which together impact the revenues and margins for services firms like Schlumberger. Baker Hughes indicates that the rig count in Asia declined from a 26 year high of 286 in January this year to 252 last month. ^[1] The decline in drilling activity is explained by falling crude oil prices which have dropped by 28% from their peak levels in May.

Oil prices have dipped over the last quarter as GDP growth estimates for 2012 have fallen and oil production in Libya is set to resume. Exploration and production budgets are tied to oil prices and a continued decline in the rig count in the Middle East – Asia region would result in a drop in our revenue forecasts for oilfield services companies. The volatility of the E&P services market is reflected in the sharp declines in the value of these stocks since the companies announced excellent results at the end of Q2 2011.

Count grows in North America

Despite the fall in the price of WTI oil, the rig count in the U.S. continued to show strong growth. The North America region added 34 rigs in the week ended on 7th Oct 2011 indicating that the market for E&P services continues to remain strong in this geography. ^[2] The U.S. has more rigs than the rest of the world combined and the North America market as a whole accounts for a major portion of the overall trefis price estimate for all oilfield services stocks.

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1. Asia’s Energy Rig Use Falls 10% in September Baker Hughes Says, Bloomberg [↩] [↩]
2. Baker Hughes Rig Count 7th Oct 2011, Baker Hughes [↩]