Schlumberger Benefits as Iraq Looks to Auction More Fields

Iraq will likely be a major market for oil services firms such as Schlumberger (NYSE:SLB) over the next few years as the nation embarks on an ambitious plan to expand its oil production facilities. In its latest move, the country’s Petroleum Contracts and Licensing Directorate is expected to make a pitch to companies to participate in its latest round of auctions that will be held in mid-December this year. ^[1] However Oil Minister Abdul Kareem al-Luaibi has indicated that the country may lower its ambitious output targets for the year 2017 in order to make sure that the industry has access to the necessary support infrastructure. ^[2] Other players in the oilfield services industry include Halliburton (NYSE:HAL) Baker Hughes (NYSE:BHI) and Weatherford International (NYSE:WFI), all of which should benefit from Iraq expanding its production activities.

We have a $107 price estimate for Schlumberger, which is at a 50% premium over its current market price.

Exploration activity  to increase with new fields

The fourth round of the auction that is scheduled towards the end of this year will see companies bid for 7 oil and 5 gas exploration areas that are expected to hold around 10 billion barrels of oil and 29 Bcf of gas. ^[1] Although Iraq holds some of the world’s largest reserves of oil, years of sanctions and war have resulted in output levels way below actual potential. However the Iraqi government sought to change all that with aggressive auctioning of fields to quadruple output to 12 billion barrels by 2017 which would have made the country the top producer of crude oil in the world.

However, analysts raised questions as to whether the country’s infrastructure could support such a rapid expansion. Iraq’s total production capacity is expected to touch 3 million bbls/day by the end of this year. ^[2] The Oil Minister has now indicated that perhaps the country may look to raise output levels to 8 – 8.5 million bbls/day by 2017 to allow for “stability in marketing operations and sales” and build better surface facilities. Despite the proposed revision in targets, the country will still remain an attractive market for oil service providers such as Schlumberger. Our forecast for the increase in rig count for the Middle East and Asia region takes into account the major expansion in the exploration and production activity in Iraq over the next few years.

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1. Iraq Pitches New Oil, Gas Fields to Investors Before Bid Round, Bloomberg [↩] [↩]
2. Iraq Considers Lowering Crude Output Target, Oil Minister Says, Bloomberg [↩] [↩]