Here's why Schlumberger is a buy

With its leading technology, this firm remains the preeminent play in the oil-services sector.

By Oct 28, 2013 1:25PM
MoneyShow.comImage: Oil derricks (© Comstock/Corbis)By Elliott Gue, Energy & Income Advisor

With a market cap of $96 billion, Schlumberger (SLB) is the largest of the oilfield services companies and more than three times the size of Halliburton (HAL).

Within the industry, Schlumberger is known for its commitment to technological innovation, strong presence in international markets relative to its peers and leadership in exploration-related services. It is the number one services outfit in every major oil-and gas-producing region, with the exception of North America, where it ranks second to Halliburton.

With the North American market for pressure pumping continuing to suffer from margin compression and reduced demand, Schlumberger stands to benefit from its limited exposure to this business line.

At the same time, the company is the best-positioned among its peers to profit from accelerating drilling activity in the deepwater Gulf of Mexico and a tightening supply-demand balance in international markets.

We also like the long-term potential of OneSubsea, Schlumberger’s recently formed joint venture with Cameron International (CAM), that will focus on developing integrated equipment and service solutions for seafloor installations.

Now that this partnership has officially closed, we expect both management teams to be more forthcoming about the unit’s strategy during their respective companies’ conference calls.

In addition,, investors shouldn’t overlook the oilfield services giant’s partnership with Hong Kong’s Anton Oilfield Services to provide integrated project management to China’s burgeoning shale-gas industry.

This joint venture gives the firm a foothold in what could prove to be a lucrative growth market over the next decade.

And in mid-April 2013, Schlumberger inked a unique deal with Forest Oil (FST) to develop the latter’s acreage in the Eagle Ford Shale. Under the agreement’s terms, Schlumberger will pay $90 million in drilling costs in exchange for a 50 percent working interest in the upstream operator’s acreage.

The two parties will split all drilling costs and proceeds after Schlumberger’s initial $90 million outlay is exhausted. Management emphasized that this move does not represent a new contract structure that the firm will pursue.

Rather, this one-off agreement gives the firm the opportunity to showcase the benefits and superior efficiency of its advanced shale oil and gas solutions in an effort to drive adoption among cost-conscious North American producers, many of which prefer inexpensive solutions.

In our view, Schlumberger remains the preeminent oilfield services provider; we rate the stock a "buy."

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