The United Kingdom appears to be warming up to the idea of resuming shale gas exploration. The county's energy secretary, Ed Davy, expressed his desire to resume drilling at an industry conference recently. Additionally, the Chancellor of the Exchequer, George Osborne, mentioned that the country is looking to initiate a generous new tax regime for shale gas, brightening the future prospects for shale gas exploration in the country.

The British government suspended shale exploration last year after hydraulic fracturing carried out in the town of Blackpool in northwest England was believed to have triggered two small earthquakes.

Resuming shale gas exploration in the U.K. could provide opportunities for Schlumberger (SLB), the world's second-largest provider of hydraulic fracturing services, as the company seeks to reduce its dependence on the North American shale gas market.

Importance of shale gas in the UK

Shale gas has been a hot subject of political debate in the U.K, with conservative lawmakers pressing for exploitation of the resource, and it's not difficult to see why. Over the last decade, the country's oil and gas consumption has remained relatively flat whereas domestic production has declined, making the country a net energy importer, which has pushed the energy prices up. Shale gas, abundantly available in the U.K., provides a relatively clean and inexpensive solution to the country's energy needs. It is estimated that shale gas could meet 10% of the county's demand for the next century.

Schlumberger faces declining US margins

The rapid increase in fracking capacity caused by the shale gas boom has now given way to oversupply of fracturing capabilities in the market. PacWest Consulting Partners estimates that the United States alone holds about 14.7 HHP of fracking capacity versus 20 HHP held globally. It estimates that the fracturing capacity utilization was 85% in Q2 and is expected to further decline through this year, impacting the pricing of fracking services. Also, given that natural gas prices in North America are at their 10-year lows, we believe the fracking business will continue to face pricing pressures.

To mitigate the effects of a weak North American market, Schlumberger can strengthen its presence in the UK and other parts of Europe like Poland that are relatively rich in shale gas reserves. The supply of fracking equipment in Europe is not as well-entrenched as it is North America. Besides, the higher gas prices in these regions would allow the company better control over the pricing of fracking services.

Schlumberger has invested significantly in developing efficient fracturing methods that require less pumping equipment and raw materials. These technologies will lower the environmental impact of fracking besides reducing logistics costs and provide a smaller operational footprint, a welcome advantage for the company in European markets.

We have a price estimate of $87 for Schlumberger, which is about 21% ahead of its current market price.