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Schlumberger N.V. (SLB)Stock (Energy Industry, Oilfield Services Industry)
Schlumberger Limited (NYSE:SLB) is the world's largest provider of oilfield services and has been the industry's technological leader for several decades. Schlumberger gained its lead by making an early shift to establish itself internationally-–the company employs more than 70,000 people in 80 countries and aims to make its greatest gains in the international market, especially the Eastern hemisphere. Schlumberger also continues to purchase majority interests in other drilling and oilfield-related technology companies. Headquartered in Houston, Texas, but generally regarded as a completely international company, Schlumberger provides companies with services and equipment for exploring, developing and producing natural gas and oil. Political concerns over oil prices and the instability of some oil-rich Middle Eastern countries mean that any oil company faces certain inherent risks. Spending on oil and petroleum products is cyclical, and companies like Schlumberger are subject to these ups and downs. Still, Schlumberger had a very strong 2007, with revenues at $23.277 billion and profits at $6.624 billion, and the current high-price market has positioned the company to continue in its success. Schlumberger also has a reputation for offering higher salaries to some more senior employees to avoid turnover - increasing loyalty, but costing the company more money.
[edit] Company StructureIn the second quarter of 2008, sales rose over $1 billion, to $6.75 billion; net earnings were $1.4 billion.[1] From 2004 through 2007, SLB's revenue increased 132% and profits increased 323%, while the number of employees increased just 53% for the longer period from 2003 to 2007, indicating that productivity per employee has increased substantially.[2] [edit] Oilfield ServicesThe term "oilfield services" refers to the equipment contracted and the consulting done by Schlumberger that aids companies in searching for and developing natural gas or oil resources. By focusing on servicing oil fields and not actually producing/selling oil, SLB earns the trust of its clients, who do not want competitors operating their oil fields. This has earned the company the moniker "The Switzerland of Oil".[3] Schlumberger's product offerings include wireline logging, pressure pumping, directional drilling, completion equipment and services, artificial lift systems, and seismic data acquisitions and processing services (see Western Geco, below). Schlumberger also advises other firms on how best to implement Schlumberger technology to find new oil and gas reserves and take full advantage of their supply. Schlumberger's oilfield services revenue increased 21% from 2006 to 2007, from $16.763 billion to $20.306 billion. Operating income increased 28%, from $4.644 billion to $5.959 billion. The increase in margins can be attributed to increased demand for oilfield services due to higher oil prices pushing up dayrates. In the first quarter of 2008, oilfield services revenue grew 3% from the fourth quarter of 2007, but margins fell 1.4% because of winter storms slowing production and spiking costs in the company's high-growth regions (like Russia). In the second quarter of 2008, oilfield services revenue grew 8% from the first quarter thanks to international growth; outside North America, revenue grew 11%. Pre-tax income for the segment grew $202 million, to $1.7 billion. Record high oil prices drove international growth.[4] [edit] Western GecoHaving previously purchased 70% of Western Geco, Schlumberger added even more to its technological advantage in the field of seismic research by purchasing the other 30% from Baker Hughes in early 2006. Western Geco is the largest provider of seismic data and imaging of potential underground reserves in the world. The company provides reservoir imaging, monitoring, and development services, with the largest land survey crews and data centers in the industry, as well as a multi-client data library. Other services include 3D and time-lapse seismic surveys as well as electromagnetic surveys. This technology allows companies to plan drilling sites more effectively. Western Geco offers most of these services in a package to companies as a product line named "Q." Q is a suite of seismic services and technology that can be used for both on land and offshore exploration, oil recovery, and risk management. Western Geco's 2007 revenues were 20% higher than those of 2006, at $2.963 billion, and operating income was 31% higher, at $1.060 billion. Margins growth was probably driven by increased demand for seismic imaging stemming from high oil prices pushing up dayrates. To add to the exploration abilities provided by Western Geco, Schlumberger recently announced plans to acquire all outstanding shares of Eastern Echo, an exploration company with 3D seismographic vessels. Second quarter 2008 pre-tax income was $196 million, with a margin of 29.2%.[5]
[edit] Regional BreakdownSchlumberger's North American revenue share declined from 34% of revenues in 2006 to 27% in 2007; the company has the greatest geographical range of any company in the industry, offering services in 80 countries, with most offices staffed by natives of those regions. Close competitor Halliburton earns 60% of its revenue from North America. This large geographic diversity could limit the overall damage from an adverse event in a specific location. Schlumberger is looking to India to grow WesternGeco; as the country grows its economy, it is searching for reliable, domestic sources of fuel. Currently, SLB is making money off of its seismic activities in the region, but if there are any significant discoveries, it's likely that SLB will receive a majority of the E&P equipment contracts.
[edit] Primary CustomersSchlumberger's primary customers are those businesses interested in using the company's technology to improve their ability to find oil and natural gas. No customer made up more than 10% of Schlumberger's consolidated revenue in 2007. The company's backlog rose $100 million, to $1.2 billion, reflecting the growing demand for oilfield services as oil and gas companies rush to increase production and take advantage of $100 oil [edit] Trends and Forces[edit] Worldwide SpreadSchlumberger has operations in 80 countries worldwide and continues to try to expand. Its 2007 growth occurred mainly internationally, with 31% in the Middle East and Asia, 30% in Europe, CIS and Africa, and 29% in Latin America. SLBb's North American market did not show significant growth, which is surprising given the deepwater exploration growth occurring in the Gulf of Mexico. To create a broader and more diverse creative and innovative base, Schlumberger has added 5,000 engineers from 122 universities and 80 countries over the past two years. These new engineers train at two centers, one in Abu Dhabi and one in Tyumen, West Siberia. Schlumberger's primary research facilities are located in the United States, England, Norway, Russia, and Saudi Arabia. A major factor in the demand for Schlumberger's services is the fact that non-OPEC oil production continually lags; as long as global demand for oil stays up, OPEC will have the ability to control prices on the market, so many companies employ Schlumberger to seek out new oil sites in the hopes that new reserves will reduce OPEC dependence. [edit] New TechnologySchlumberger's success depends on its customers' desire to improve their performance while eliminating technical risk. One particular technological service, the new Wireline Scanner Family of logging services, has played a large part in recent quarters' increased revenues. Another advance, the Quicksilver Probe, allows for faster sampling of reservoir fluids with little contamination, which reduces costs for companies exploring new oil fields. By far the most lucrative technological advantage has come through WesternGeco's Q technology, whose revenues reached $726 million in 2006. A total of nine Q-Marine vessels will have launched by 2009 and seven Q-Land crews by the end of 2007. Much of Schlumberger's most innovative technology (including the Q crews) help other companies to find oil and natural gas reserves. As many of the known reserves begin to dry up, these companies will have to use more advanced technology to find new sources. While Schlumberger's prospects for new technology and growth are high, their stock price has likely already incorporated this optimism because it had such a strong year in 2006 and investors expect it to continue. It's possible (and the company believes) that industry expansion will depress margins going into 2008; with 146 rigs from across the industry going online going into 2008, its very likely that the efficiency of drilling and exploration will be depressed until all logistical issues (such as undercapacity of workers and inputs) associated with bringing new systems online are taken care of; these effects have already been seen in 3Q07 offshore growth, which was down in comparison to land market growth.
[edit] AcquisitionsSchlumberger counts on technology-fueled growth to contribute to its success. Its wide range of services necessitate the acquisition of other firms to supplement in-house research. Schlumberger has acquired many such companies in the last three years. The largest, Western Geco, has already generated large revenue returns. Other purchases include Ødegaard (inversion software), TerraTek (geomechanical expertise), Reslink (specializes in technology to complete oil wells in difficult locations like in sand), and PetroAlliance (Russian oilfield services company). [edit] RisksAlthough advances in alternative energy usually mean a decline in profits for companies in the oil business, Schlumberger is not that vulnerable in the short run. The company is already a leader in the field (among rival companies Transocean (RIG), Halliburton Company (HAL) and Baker Hughes (BHI)) in terms of technology to find new sources of petroleum and natural gas. That technology is important to oil drilling companies pressured by advances in alternative energy. A long-run shift to an alternative fuel, however, would obviously hurt any company so directly tied to the oil market. With increasing worldwide fear of climate change, recent growth in the renewables market is indicative of possible long-term growth, a definite threat to this company. [edit] Seasonal FluctuationsWith so much capital invested in pulling oil and gas out of the Gulf of Mexico, the hurricane season provides large risks to the company, especially to third-quarter income when growth tends to slow because production is brought down to prevent damage from the storms that sweep the coast in late summer. For example, in Q307, pre-tax margins for the company's North America segment fell 427 points Q207, to 26.9%, because of storm-based production cutbacks. Furthermore, unexpected weather systems have to potential to cause permanent damage to capital equipment in the ocean, leading to expensive repairs and falling margins. Similar effects can be seen in Russia, when severe winter weather puts a damper on regional production because of the difficulty of workers laboring in a Siberian clime, and in the North Sea, where severe weather systems hamper production capability.
[edit] Oil MarketThe oil market has perhaps more political implications and ties than any other major product market in the world. Although the sectarian divisions within the Organization of the Petroleum Exporting Countries (OPEC) will make it difficult for that organization to cut supply the way it has in the past, its supply shocks of the 1970s had an extremely adverse effect on the oil market, causing a fourfold increase in prices over just a few months. In the short run, such a decrease in supply could actually help Schlumberger's revenues as other companies look to increase their oil supplies. At the same time, a rise in gas prices would decrease demand for oil, hurting all related companies in the long run.
[edit] DivestmentSchlumberger's recent activity in the Sudan has caused many activist groups, such as the Sudan Divestment Task Force, to add its name to their lists of companies targeted for divestment. Although the push to divest from Schlumberger has not gained as much steam as the movements against Sinopec and PetroChina (two Chinese oil firms with energy interests in Sudan), Schlumberger does face the possibility of divestment. While universities and public institutions were the first to divest, 13 states have now adopted models of divestment from Sudan. But direct divestment does not matter as much in today's market as it did when there was a public outcry to divest from South Africa because of apartheid. Today most investors prefer large indexes and funds, which still invest in these companies. However, if the divestment movement continues, there could be pressure on large index funds and exchange-traded funds to stop adding the targeted companies to their portfolios to avoid losing large investors. [edit] CompetitionSchlumberger is one of the largest companies in the industry, providing services to companies to allow them to better find and take advantage of oil and Natural gas reserves. Western Geco's Q technology - providing whole teams on either land or sea to create a comprehensive picture of the prospects for drilling - gives Schlumberger a definite edge in that type of exploration. In addition, several of its other technologies for testing and drilling are unique in the field. Schlumberger is the largest deepwater drilling company in the world, though the recent merger between GlobalSantaFe and Transocean has created the world's second largest deepwater company, and investors are speculating that the new company could eventually surpass Schlumberger.
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