Changing Face Of The Oilfield Services Industry

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Schlumberger Limited
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The oilfield services industry has been in the doldrums since the dawn of the commodity downturn in 2014. While some companies have resorted to mergers and acquisitions, others have continued to focus on innovating their product offerings to survive the commodity trough. Schlumberger (NYSE:SLB), being the world’s largest oilfield services company, has also struggled to remain afloat in the ongoing oil slump. Consequently, the the Houston-based company acquired Cameron, an oilfield equipment maker, with an aim to create and offer an integrated “pore-to-pipeline” product to its clients globally. While the deal did improve the company’s top-line, the company has not been at peace with its pace of growth. Consequently, Schlumberger has changed its strategy and is now planning to become an oil and gas producer (apart from being a oilfield service provider) by acquiring an equity stake in drilling projects across the globe.

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As per its new strategy, Schlumberger had signed a pilot with YPF to develop a shale oil project in Vaca Muerta, Argentina, in April of this year. The company committed to provide its technical services and about $390 million to acquire a 49% stake in the block that was operated by YPF. Recently, the company entered into a similar agreement with the Nigerian National Petroleum Corporation (NNPC), FIRST Exploration & Production (First E&P) for the development of the Anyala and Madu fields, offshore Nigeria. Under the agreement, Schlumberger will contribute the required services in kind and capital ($700 million) for the project development until first oil, expected in 2019. Further, the company has also announced an agreement to acquire a majority (51%) equity interest in the Eurasia Drilling Company (EDC), Russia’s biggest drilling company. This series of investments in oil and gas projects clearly indicates the company’s inclination towards entering the oil and gas production market.

However, this isn’t exactly a new strategy for the company, since it already holds a unit called “Schlumberger Production Management” (SPM), under which it has previously invested in oil and gas joint ventures and projects. Through its SPM investments, the company co-managed about 230,000 barrels per day of oil and gas output at the end of 2016. Going forward, the company aims to increase its investment in oil and gas projects since this will allow it to take up an active role in the drilling process and oilfield management of these projects, while carrying out all the service contracts that are required to fulfill a particular project. This implies that the company will not have to compete with its peers for the various service contracts in a project and will be responsible to complete the entire project.

Further, it will also mean that Schlumberger will have a share in the profits from the sale of oil and gas produced from the project. This will give the company a huge upside in case the commodity prices rebound in the coming years. On the flip side, Schlumberger will not receive the upfront service payment it receives for providing services to it clients, irrespective of the project turning profitable for the operator. Rather, it will have to bear the downside of these projects in case commodity prices continue to hover at current prices. Lastly, the new strategy may also instigate Schlumberger’s competitors, Halliburton and Baker Hughes (a GE Company), to enter into the oil and gas production segment, along with their oilfield services business. While it is difficult to comment on the effectiveness of this strategy, this could alter the face of the entire oilfield services industry.

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