Friday November 30, 2012
by Elliott Gue, editor Energy & Income Advisor
We regard oil-field services as one of the best-positioned sub-sectors within the energy patch over the next six to 12 months, as the group will reap the rewards of accelerating exploration and development in deepwater fields.
Investors looking for exposure to these trends will gravitate toward Schlumberger (SLB) because of its superior technology, exposure to international markets and relative insulation from deteriorating market conditions in North America.
We regard Schlumberger as the best-positioned of the big oil-field services firms for the following reasons.
Less Exposure to the North American Onshore Market:
Schlumberger derives about one-third of its revenue from the North America.
Superior Exposure to the Gulf of Mexico:
Drilling activity in the Gulf continues to accelerate and is approaching pre-spill levels–a significant tailwind for Schlumberger. We expect upcoming lease sales of blocks in the western Gulf and the central Gulf to fuel further exploration and development.
First to Right-Size:
Management identified the potential for an oversupply of pressure-pumping capacity in 2010 and added horsepower in a far more disciplined manner than Baker Hughes and Halliburton.
Schlumberger was the first of the Big Four to set minimum profit margins for its pressure-pumping operations, preferring to idle crews instead of chasing cut-rate contracts.
The firm also restructured its North American business two years ago to optimize its supply chain and lower its cost structure, a process that Baker Hughes is still tackling.
Schlumberger has focused on developing advanced technology related to hydraulic fracturing, as opposed to merely adding horsepower.
The company can provide customers with three-dimensional models of the shale reservoir to optimize production while its Hi-Way fracturing system uses less water and proppant.
In the third quarter, Schlumberger completed 2,100 fracturing stages with the Hi-Way system–up 60 percent sequentially.
A recent study shows that the use of this completion technology on wells in the Eagle Ford Shale yielded average production that was 65 percent higher than standard horizontal wells.
Schlumberger’s most recent innovations in seismic division enable the firm to render highly detailed, three-dimensional models of geological formations. This data is highly prized by exploration and production firms, which rely on seismic information to determine the best locations to drill exploratory wells.
As an ancillary business, Schlumberger provides technology and software to analyze the raw seismic data and consulting services to help customers formulate their drilling and development plans.
With prevailing charter rates on ultra-deepwater drillships exceeding $600,000, high-quality geophysical data is critical to saving money and avoiding every oil company’s nightmare: the dry hole.
The company also stands to benefit from its traditional strength in exploration-related services and products, an area where burgeoning demand in international markets has enabled the industry to push through price increases.
Meanwhile, with fewer mega-contracts on the horizon, the industry should be able to raise prices on smaller projects.
Schlumberger’s commitment to technological innovations also gives it up a leg up on the competition; staying on the leading edge enables the firm to charge higher prices for these premium services.
Learn more about this financial newsletter at Elliott Gue's Energy & Income Advisor.