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Schlumberger Limited (NYSE:SLB) 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. 89% of the company's 2008 revenue came from the oilfield services segment, through which Schlumberger provides oil production equipment and services covering the entire life cycle of a reservoir.[1] Within this segment, Schlumberger's Integrated Product Management model provides drilling rig management and services to well constructions and operational rigs.[2] WesternGeco, which accounted for 10% of the company's revenue, provides reservoir imaging, monitoring, and development services to land, marine, and shallow-water well projects.[3]
Schlumberger provides its services to oil and gas companies operating across the world. Although Schlumberger is headquartered in Houston, 57% of the company's sales in 2008 came from Europe, Africa, the Middle East, and Asia. Its abroad operations, especially those located in Latin America, are the fastest growing segments in terms of sales, but Schlumberger's worldwide presence exposes the company's revenue and profitability to regional uncertainty, instability, and currency volatility. Nearly all of Schlumberger's revenue comes from providing services and equipment to oil and gas rigs, and the worldwide levels of oil and gas production heavily effect Schlumberger's revenues as a result.[4] When oil prices peaked around $147/barrel during the first half of 2008, oil exploration and production companies were attempting to extract as much oil from the ground as possible.[5] For Schlumberger, quarterly revenues increased by 15.10%, 19.60%, and 22.50% for the first, second, and third quarter of 2008 when compared to those quarters in 2007.[6] When oil prices fell in the second half of 2008, and crude oil inventories increased, the amount of crude oil produced declined, which has meant less of a need for oilfield services.[7] With fewer contracts and lower sales, Schlumberger has cut its capital expenditures budget or 2009 and has laid off 6% of its work force as of January 2009.[8]
[edit] Company Overview
For 2008, revenue increased 17% from a year earlier to reach $27.16 billion.[10] The oilfield services segment's overall revenue rose by 20% during 2008 primarily due to higher revenues from Schlumberger's international operations.[11] In 2008, oilfield service operations in Latin America and the company's Europe/Africa/CIS operations resulted in revenues that were 28% and 24% higher year over year, respectively.[12] On the other hand, revenues from the company's WesternGeco operations fell 4% in 2008 as a result of lower Multiclient sales, reduced land activity, cost inflation that affected Marine operations, and less need for seismic operations.[13] While revenues for 2008 increased from 2007, low energy prices and smaller demand for petroleum products are capable of significantly reducing Schlumberger's revenue in 2009.[14]
[edit] Oilfield Services( 89.5% of 2008 Revenue)
Through its oilfield services segment, Schlumberger provides technology, project management tools, and information solutions to companies engage in the exploration and production of oil and natural gas. Schlumberger divides the company's oilfield services operations geographically into segments called GeoMarkets.[16] The principle GeoMarkets include North America, Latin America, Europe/CIS/Africa, and the Middle East & Asia. When the company was first formed, Schlumberger sold its wireline logging technology in order to provide detailed oil-and-gas well information to exploration and production companies.[17]Through acquisitions and its own research and development department, Schlumberger offers a full range of services and equipment for the entire life cycle of the reservoir.[18] The company's oilfield products include wireline logging, directional drilling technology, well testing, artificial lifts, and information solutions. Schlumberger's operates using a business model known as Integrated Project Management(IPM), which provides its customers with the necessary products and technology as well as the management to operate those products.[19]
In this segment, 2008 full-year revenues increased 20% when compared to the previous year to $24.28 billion.[20] All technologies grew by double-digits in 2008, in particular Schlumberger's well services, drilling and measurements operations grew substantially. Revenue from operations in Latin America increased 28% in 2008 due to higher sales of IPM products in its Central America and Peru/Colombia/Ecuador GeoMarkets as well as higher offshore well services sales in its Brazil operations.[21] Higher demand for oilfield services in Russia led to a 24% increase in 2008 revenue in Schlumberger's Europe/CIS/Africa GeoMarket.[22]
[edit] WesternGeco
Schlumberger's WesternGeco operations provide reservoir imaging, monitoring and well development services, and seismic crews and data processing centers.[23] WesternGeco sells its 3D and time-lapse (4D) seismic analysis services for prospective and current reservoirs.[24] Through its WesternGeco operations, Schlumberger provides seismic imaging and monitoring services to land-based, marine, and shallow-water reservoirs.[25]
Full-year 2008 revenue of $2.84 billion was 4% lower than in 2007.[26] When oil prices began to drop in the second half of 2008, many of Schlumberger's customers reduced their spending on seismic development and imaging services.[27] As a result, multiclient revenue declined 18% in 2008. However, revenue from its data processing services increased 19%.[28]
[edit] Trends and Forces
[edit] Fluctuating crude oil and natural gas production had significant impact on Schlumberger's profitability in 2008, and shaped company's strategy in 2009
Because Schlumberger's services help oil E&P companies extract oil and natural gas from the ground, the company's revenue is strongly effected by the production and consumption of oil and natural gas. In 2008, Schlumberger's quarterly revenue growth closely resembled the changing price of oil. Year-over-year quarterly revenues increased by 15.10%, 19.60%, and 22.50% for the first, second, and third quarter of 2008. During those quarters, oil prices were rising, peaking at $147 per barrel in July 2008.[29] By the end of 2008, oil prices had fallen to under $40 per barrel.[30] Due to lower consumption of oil products, the number of operational U.S. drilling rigs dropped 25% between September 2008 and January 2009.[31]In the fourth quarter, Schlumberger’s profit fell 17% from a year earlier as costs rose 19% due to numerous high cost projects involving far offshore drilling.[32] As result, cutting costs became the focus of Schlumberger's management in early 2009.
While profits also fell for first quarter 2009, Schlumberger was able to reduce its operating costs. For the first quarter of 2009, Schlumberger reported revenues of $6 billion versus revenues of $6.89 billion in the fourth quarter of 2008, and $6.29 in the first quarter of 2008.[33] Operating income decreased 25% when compared to the fourth quarter of 2008 and 28% year on year.[34] The overall decline in natural gas rigs in North America and Russia meant less need for oilfield services equipment and services and brought on the decline in quarterly revenues for the company's oilfield services segment, which were 13% lower when compared to the fourth quarter 2008.[35] In anticipation of lower demand for its products and services for the rest of 2009, Schlumberger has cut operating costs significantly through layoffs and capital expenditure cuts. Operating costs fell by $405 million in the first quarter of 2009 versus the fourth quarter of 2008.[36]
[edit] Schlumberger's Worldwide Operations Have Potential for Growth, but Expose Company to Regional Risks
By operating in over 80 countries worldwide, a majority of Schlumberger's revenue growth comes from operations outside of the United States.[37] Schlumberger operates worldwide for a good reason; the company's two fastest growing GeoMarkets are the Latin America and Europe/CIS/Africa operations because operations in sales of well testing and well development equipment and services in Russia, Venezuela, and Brazil.[38] Operations in these countries required Schlumberger's equipment and operational knowledge in order to test, analyze and developed oilfields discovered in 2007 and 2008.[39] In 2008, Brazil began developing oil wells in its Tupi fields, an offshore oil basin discovered to have a potential 8 million barrels of oil.[40] Developing new fields in Russia, Venezula, and Brazil requires technologically advanced equipment, and Schlumberger's sales in these regions have the potential of benefiting from increased investments in the development of new and current oilfields.
However, Schlumberger's vast operations expose the company's operations and profitability to regional political risk. Regional instability or economic uncertainty have the potential of effecting oilfield developments in a country, and reduces the need for equipment from service companies like Schlumberger.[41]
Schlumberger's Venezuelan operations have the potential of being taken over by the Venezuelan government. By June 2009, Venezuelan President Hugo Chavez had nationalized most of Venezuela's oil operations, and, beginning in May 2009, Chavez began to seize several small oil service companies along with U.S.-owned gas compression units.[42] Chavez has not taken over the Venezuelan operations of large service companies like Schlumberger, Baker Hughes (BHI), and Halliburton Company (HAL) as of June 2009.[43] However, the company's Venezuelan assets have the potential of being seized by the government if Schlumberger refuses to accept the terms that are on offer or refuse a write-down on their debt.[44]
Currency inflation also has the potential of reducing revenues from the sale oilfield services. In the fourth quarter of 2008, revenues from Latin American operations declined 2% compared to the prior quarter as a result of currency inflation in many Latin American countries.[45] Overall, currency changes in the last quarter of 2008 resulted in a 3% decline in revenues when compared to the third quarter.[46]
In March 2009, Schlumberger finalized a $687 million drilling contract with Petroleos Mexicanos, or Pemex.[47] While Pemex's production declined 9% in 2008, the company plans on reversing that trend by increasing the money it spends on exploration and production projects.[48] Schlumberger singed a three-year contract for Pemex's Chicontepec region, a field located in northern Mexico.[49]
[edit] The demand for new equipment and technology is vital to Schlumberger's revenue growth
In 2008, 89.5% of Schlumberger's revenue came from the sale of its oilfield services. As a result, the ability to provide its customer's with technologically advanced and accurate equipment has the potential of effecting Schlumberger's revenues substantially.[50] Revenues from Schlumberger's oilfield equipment experienced double-digit growth in 2008, especially equipment used in the development and analysis of complex wells.[51] In response, research and development expenditures increased 12.5% in 2008 when compared to 2007. The need for technologically advanced equipment is capable of determining amount of capital Schlumberger devotes to developing new technology in 2008.[52] Many Oil & Gas Majors have reduce their oil production for the first quarter of 2009, which has resulted in lower sales of Schlumberger's technology.[53]
[edit] Competition
Baker Hughes (BHI): Baker Hughes is an oilfield services company that sells drilling equipment and provides technology services that help oil E&P companies to drill oil wells.[54] The company operates in two segments: the Drilling and Evaluation segment, and the Completion and Production segment.[55] The drilling and evaluation operations supply products and services like drill bits and wireline logging that are used to drill and evaluate oil and natural gas reservoirs.[56] The company's Completion and Production segment supplies equipment and provides services that aid exploration and production companies from the completion of a well to the end of the reservoir's life. In April 2008, the Company acquired two reservoir consulting firms.[57]
Halliburton Company (HAL): Halliburton supplies oill and natural gas companies equipment and services that help them extract crude oil and natural gas from the ground.[58] The company's Completion and Production operations consist of production enhancement services, completion tools and services, and cementing services designed for completed and operational wells.[59] Oil and natural gas companies can use the equipment and technology provided by Halliburton's Drilling and Evaluation Segment to analyze potential well sites and begin drilling.[60]
BJ Services Company (BJS): BJ Services provides pressure pumping and other oilfield services to oil and natural gas exploration and production companies.[61] Pressure pumping services include cementing and stimulation services employed in the completion of new onshore and offshore wells and in remedial work on existing wells and accounts for 81% of the Company's 2008 revenue.[62] BJ Service's oilfield services operations provide equipment that help oil and natural gas companies develop and maintain wells.[63]
| 2007 Revenue | 2007 Operating Income | 2007 R&D Expenses | 2007 Gross Profit | 2008 Revenue | 2008 Operating Income | 2008 R&D Expenses | 2008 Gross Profit | |
|---|---|---|---|---|---|---|---|---|
| Schlumberger[64] | 23,276 | 6,467.5 | 728.5 | 7,794.8 | 27,162.9 | 6,450.6 | 818.8 | 8,195.9 |
| Halliburton[65] | 15,264.0 | 3,498.0 | N/A | 3,739.0 | 18,279.0 | 4,010.0 | N/A | 4,230.0 |
| Baker Hughes[66] | 10,428.2 | 2,277.8 | 372.0 | 3,582.6 | 11,864.0 | 2,376.0 | 426.0 | 3,910.0 |
| Transocean[67] | 6,377.0 | 3,239.0 | N/A | 3,596.0 | 12,674.0 | 5,357.0 | N/A | 7,319.0 |
[edit] Recent Events
Schlumberger registers strong y-o-y growth in its 3Q 08 top-line, however margins decline reflecting the impact of hurricanes - Gustac & Ike, slowdown in Alaska and unfavourable revenue mix in Latin America. [68]
[edit] Notes
- ↑ slb.com: Investor Center, Revenue and Income from Operations, April 2009
- ↑ Schlumberger Company Background
- ↑ slb.com: Company Background
- ↑ slb.com: Company Background
- ↑ slb.com: Company Background
- ↑ slb.com: Company Background
- ↑ slb.com: Company Background
- ↑ slb.com: Company Background
- ↑ : SLB Annual Report 2008
- ↑ SLB 2008 Annual Report page 1-2
- ↑ SLB 2008 Annual Report page 1-2
- ↑ SLB 2008 Annual Report page 1-2
- ↑ SLB 2008 Annual Report page 1-2
- ↑ SLB 2008 Annual Report page 1-2
- ↑ : SLB Annual Report 2008
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 19-22
- ↑ SLB 2008 Annual Report Pages 23-24
- ↑ SLB 2008 Annual Report Pages 23-24
- ↑ SLB 2008 Annual Report Pages 23-24
- ↑ SLB 2008 Annual Report Pages 23-24
- ↑ SLB 2008 Annual Report Pages 23-24
- ↑ SLB 2008 Annual Report Pages 23-24
- ↑ slb.com: Company Background
- ↑ Schlumberger 2008 10-K Report, page 17
- ↑ WSJ: Schlumberger's Net Falls 17% Amid Pullback in Oil Drilling, January 2009
- ↑ WSJ: Schlumberger's Net Falls 17% Amid Pullback in Oil Drilling, January 2009
- ↑ SLB 2009 1Q Earnings, April 2009
- ↑ SLB 2009 1Q Earnings, April 2009
- ↑ SLB 2009 1Q Earnings, April 2009
- ↑ SLB 2009 1Q Earnings, April 2009
- ↑ SLB 2008 Annual Report, page 7
- ↑ SLB 2008 Annual Report, page 17
- ↑ SLB 2008 Annual Report, page 17
- ↑ Oilshalegas.com: Brazil Tupi Oil Field Information - Santos Basin, August 2008
- ↑ SLB 2008 Annual Report, page 7
- ↑ Reuters: Chavez to expand Venezuela oil nationalizations, June 2009
- ↑ Reuters: Chavez to expand Venezuela oil nationalizations, June 2009
- ↑ Reuters: Chavez to expand Venezuela oil nationalizations, June 2009
- ↑ SLB 2008 Annual Report, page 19
- ↑ SLB 2008 Annual Report, page 19
- ↑ WSJ: Schlumberger Wins $687M Drilling Contract In Mexico, March 2009
- ↑ WSJ: Schlumberger Wins $687M Drilling Contract In Mexico, March 2009
- ↑ WSJ: Schlumberger Wins $687M Drilling Contract In Mexico, March 2009
- ↑ SLB 2008 Annual Report, page 17
- ↑ SLB 2008 Annual Report, page 17
- ↑ SLB 2008 Annual Report, page 17
- ↑ SLB 2008 Annual Report, page 17
- ↑ BHI company profile, May 2009
- ↑ BHI company profile, May 2009
- ↑ BHI company profile, May 2009
- ↑ BHI company profile, May 2009
- ↑ Reuters: HAL Company Profile, May 2009
- ↑ Reuters: HAL Company Profile, May 2009
- ↑ Reuters: HAL Company Profile, May 2009
- ↑ Retuers: BJS Company Profile, May 2009
- ↑ Retuers: BJS Company Profile, May 2009
- ↑ Retuers: BJS Company Profile, May 2009
- ↑ Morningstar: SLB Financial Statements
- ↑ Morningstar: HAL Financial Statements
- ↑ Morningstar: BHI Financial Statements
- ↑ Morningstar: Financial Statements for RIG
- ↑ iirgroup.com research report on Schlumberger Ltd.
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