Schlumberger (NYSE: SLB) is the world’s largest oil field services company. Oil field services firms work as contractors for oil and gas companies, helping them to explore, locate and drill oil and gas wells and produce hydrocarbons. In 2011, the firm had revenues of around $40 billion and EBITDA margins of around 28%.
We break down the companies main operations below as well as discuss the factors driving growth ahead such as international shale exploration and offshore and subsea production. Our price estimate is $86, which is 20% ahead of the market price.
What Drives The Firm’s Revenue?
The company’s business is largely cyclical, depending on the expenditure of oil and gas firms. In a strong economy, when demand for oil is growing and the outlook for oil prices is bullish, oil and gas firms typically increase their exploration and production budgets, thereby increasing business for oil field service firms like Schlumberger. The opposite is true when oil prices are on the decline. The Baker Hughes rig count is a widely used metric of activity in the oil field services industry that tracks the number of active oil and gas rigs and reflects the demand for oilfield services. However, the interpretation of the rig count is changing over time as drilling rigs become more technologically advanced allowing them to complete jobs faster.
In Which Regions Does The Firm Operate?
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The firm’s business is categorized into four geographic segments North America, Latin America,Europe/CIS/Africa and Middle East & Asia. The firm operates in around 85 countries and derives over 65% of its revenues from operations outside the United States. In comparison, Halliburton (NYSE: HAL), its biggest competitor derives just 40% of its revenues from international operations. Schlumberger’s globally diversified operations allow it to mitigate geopolitical and market related risks.
What Products And Services Does It Provide?
Schlumberger’s products and services cater to the entire life cycle of oil wells. Services provided include evaluating the subsurface conditions while drilling and during production (wireline services), drilling technologies, well services like cementing and production enhancement, well completion, artificial lift systems for pumping oil from wells, and a host of information and software services to assist oil firm in interpreting data and managing exploration and production activity. The firm also offers an integrated project management service that combines the required services and products with the rig and project management skills, to provide a comprehensive solution to customers. This is advantageous for customers, given that it could reduce the management and logistics costs of having to deal with multiple vendors for different services.
The Competition And How The Firm Differentiates Itself
Schlumberger primarily competes with firms like Halliburton (NYSE:HAL) , Baker Hughes (NYSE: BHI) and Weatherford International (NYSE: WFT) which also provide an array of oilfield services. It also competes with smaller, niche firms in certain specialized services.
Oil field services firms develop a competitive edge primarily through technology and the array of services that they can provide. Developing a technological edge either comes through spending on R&D or via acquisitions. Acquisitions of smaller niche firms with strengths in certain technologies have helped Schlumberger to build capabilities relatively quickly. However, acquisitions are often quite expensive. For instance, the firm paid a 37% premium over the market price to acquire Smith International, a leading player in drilling technologies. The firm’s R&D spending is also the highest in the industry. Last year, the firm spent around $1 billion in research and development, more than double Halliburton’s spending and almost as much as Exxon Mobil (NYSE:XOM). (Form 10-K 2011)
What Are The Current Trends Impacting the Firm’s Stock?
International Shale Gas Plays:
As countries like China, Saudi Arabia and the U.K. are opening up to shale gas exploration, it could prove to be an opportunity for Schlumberger, which has historically under-capitalized on the international market for unconventional plays. This will be attractive to Schlumberger, given that the supply of fracking equipment is not as well entrenched internationally as it is in the U.S., and global gas prices are also much higher compared to the North American market (For instance natural gas prices in Europe are more than double than those in the U.S.), this could enhance the firm’s bargaining power and allow for better pricing of services. (See Also: Schlumberger Can Gain From UK Lifting Its Fracking Ban) However, it could take several years for these countries to ramp up and begin full scale commercial production.
Growth In Offshore and Subsea Production:
High oil prices and the gradual decline in easily accessible land-based reserves are prompting oil and gas companies to look towards offshore reserves. In the last 10 years, more than half of the oil and gas discoveries came from offshore locations. While the subsea production market has been traditionally serviced by smaller specialized firms, Schlumberger has been making steady inroads into this space. Last year the firm acquired Framo Engineering, a Norway based company that provides technologies focused on the subsea market. More recently, the firm signed a deal with Cameron International Corp, a provider of subsea equipment, to jointly develop products, systems and services for the subsea market. Due to challenging conditions and the high level of service intensity, these services typically command attractive rates, and could help Schlumberger increase its revenue per rig and profit margins. (See Also: What The Cameron Subsea Deal Could Mean For Schlumberger)