Innovation Boosts Schlumberger

07/05/2013 9:00 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

This oil-services leader represents one of the top picks in the current environment, based on valuation and potential upside catalysts, points out Elliott Gue in Energy & Income Advisor.

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

The firm is the No. 1 services outfit in every major oil- and gas-producing region, with the exception of North America, where it ranks second to Halliburton.

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.

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.

Investors also shouldn't overlook the oilfield-services giant's partnership with 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 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% 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.

With its superior technology and exposure to strengthening international markets, Schlumberger remains the preeminent oilfield-services provider, and rates a buy.

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