Costly drilling could boost Schlumberger to $100

The company stands to gain from the latest complex exploration methods.

By Trefis Jan 27, 2012 10:47AM
Scott Gibson/CorbisHigh oil prices and declining production from existing fields have been prompting oil companies to explore technically complex and remotely located reserves. As a result, oilfield services companies like Schlumberger (SLB) are positioning themselves to benefit from the long-term trends shaping the energy industry.

Already we see strong revenue and earnings growth because of the rising interest in shale exploration and increasing deepwater activity. We expect Schlumbeger to leverage its global presence and its technological edge to benefit from the current era of high energy prices. The company competes with other players in the field, such as Halliburton (HAL) and Baker Hughes (BHI).

We have a $101 price estimate for Schlumberger, which is at a 40% premium to its current market price.

Unconventionals exploration adds upside

Expanding interest in the exploration of shale deposits has been one of the biggest trends in the oil and gas sector over the past few years. Shale exploration has developed rapidly in the U.S. over the last few years with advances in technologies such as horizontal drilling and hydraulic fracturing that allow for the extraction of gas trapped in shale rock. Shale plays now account for a third of the natural gas produced in the U.S. and the country has now overtaken Russia to become the world's largest producer of gas.

In addition to the boost to the rig count because of shale exploration, oilfield services companies like Schlumberger also benefit from higher revenues from unconventionals because of the higher service intensity associated with such deposits and the niche technology involved. Interest in other unconventional sources such as heavy oil, coal bed methane and tar sands is also rising, driven by high crude prices.

Schlumberger North America Revenue per Rig

Over the next few years, countries across the world including Argentina, Poland, China and some Middle Eastern nations are also expected to experiment with these emerging technologies in unconventional exploration. Despite some resistance from environmentalists who are opposed to shale exploration, we expect E&P directed towards unconventionals to be adopted widely as oil and gas prices rise and countries take steps to strengthen energy security.

Deepwater and remote resources

Another trend that will benefit Schlumberger over the future is the increasing complexity of discovering and developing new resources. Most major oil discoveries over the past few years are either located offshore or in geographically remote locations such as Kazakhstan, Iraq and the CIS. The remote location makes exploration more logistically challenging, adding to the project complexity. In addition to this, stricter regulations on deepwater drilling are also expected to increase the costs of developing these resources, which in turn will add to the revenues of Schlumberger and other oilfield services companies.

Schlumberger Annual Avg Rig Count in Europe Africa and CIS

Recent discoveries also tend to be smaller in size than old deposits and it has been observed that output declines faster in small fields. This will force oil companies to boost spending on exploration to maintain reserves, increasing the level of involvement of oilfield services providers.

Mature fields

Many large oil fields in the world like the Cantarell fields in Mexico and fields in the North Sea are seeing a decline in output. Investors, including National oil Companies (NOCs), are looking to invest in technologies to boost production rates in these mature fields to stem the falling output. Schlumberger has an array of technologies such as wireline to increase production rates in such mature fields. With many fields experiencing a drop in output, analysts expect the market for such services to jump over the future.

Project delivery

Schlumberger's global footprint and its advanced project management and delivery expertise give the company a key advantage over its rivals. Schlumberger has invested heavily in its project delivery capabilities and is pushing its clients to accept performance based contracts through which it can monetize its expertise and boost its revenues as well as margins.



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