Why is the Oil & Gas Supply Sector Growing?
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Instead of looking at the whole sector and numerous companies, let’s take a look at one company as an example and observe why it is growing. Schlumberger Limited (NYSE: SLB) recently peaked after a nice 6 week climb. But this peak looks more like a plateau. Will it lead to a further climb in the stock? Let’s take a look at what is happening in the “oil rig” industry that is causing this company to prosper like it is.
Schlumberger Limited provides oil & gas drilling & exploration companies technologically advanced equipment and management services that aid in the extraction and production of crude oil and natural gas. Schlumberger provides its services to oil and gas companies operating across the world. The company's oilfield services segment accounts for about 90% of the company's revenue.
Two Trends Helping to make SLB Bullish
Margins and pricing is becoming more favorable for rigging and this has created more activity both on and off shore. Global floating rigs are up 18% from 4Q2011 levels alone. The Baker Hughes Rotary Rig Counts provide statistics on the number of active drilling rigs exploring or developing oil and natural gas in the U.S., Canada, and internationally. Look at these statistics:
- The international rig count for July 2012 was 1,264 up 114 from the 1,150 counted in July 2011
- U.S.rig count for July 2012 was 1,945 up 45 from the 1,900 counted in July 2011.
The second trend is increased drilling activity in Russia where SLB is particularly strong. The company has invested more than $2 billion since the mid 2000’s to help develop Russian oil and gas industry infrastructure as well as train highly skilled professionals. The country has the world's largest natural gas reserves and is the 8th largest when it comes to oil. Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), competitors of Schlumberger, also have significant operations in the region. Halliburton works with TNK-BP in the Tyumen region of Russia. The contract between the two calls for Halliburton to be involved in the provision of drilling fluids, waste management services, cementing, drill bits, directional drilling and logging-while-drilling services for the Uvat development. This is but one example for it. Baker Hughes on the other hand works with Statoil in one contract providing integrated drilling services on the Norwegian continental shelf. The company has the reputation for providing the best combined technical and commercial offer of all companies that were competing for the work.
Despite competition, I believe SLB has the brightest future in the Russian market. The company has been in this global region for decades with a rich history. The first contract with Soviet Government was concluded in 1929 for projects in Baku and Grozny. Schlumberger and the USSR Government established a joint venture in 1932, which operated successfully for five years. Returning to Russia in 1991, SLB became the first oilfield service company to provide high-technology geophysical services in Western Siberia-working in the Varyegan and Tagrin oilfields. Today the company operates in every oil field region in Russia. It maintains 50 operational bases, and of the 15,000 employees in Russia, 98% are nationals.
A Picture of the International Markets
It is the international markets that strengthened the company’s 2Q 2012 numbers. Latin America, the Middle East and Asia regions grew steadily as did Europe/CIS/Africa regions. Schlumberger expects the international rig count to grow by more than 10% with the best prospects in Saudi Arabia,Australia, and China.
Natural Gas Still need to be Addressed
One cannot ignore the declining demand for gas rigs due to the low prices as operators continue to cut back on production. Schlumberger has big exposure in the North American region of gas-based activity and it continues to decline. Even though international shale looks promising, hydraulic fracturing-related work continues to face difficulty from overcapacity and will likely continue to decline this year. Coupled with higher costs, the gas drilling slowdown could weigh on growth in the second half of the year for all three of the big rig servicing companies: Baker Hughes, Schlumberger, and Halliburton Co.
The new found interest in drilling along with the regulatory pressure to invest in new equipment to make rigs more efficient is fueling the gas & oil rig supply industry right now. I expect it to continue despite the challenges from natural gas. If that industry turns around, it will really fuel the growth of companies like Schlumberger, Halliburton, and others in the industry.
johnmylant has no positions in the stocks mentioned above. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and Schlumberger. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.