Why Schlumberger is the all-purpose shale play


I am not going to get into details about Schlumberger’s (SLB) financial position other than to point out that it has had consistent growth, both top and bottom line. The company has also enjoyed expanding margins, a solid balance sheet, and generally has been very friendly to shareholders with their dividend and share buybacks.

Instead, I’ve identified a few themes in the macro environment to get an idea where the energy sector is heading. Because of SLB’s dominant market share in the service industry, in my opinion its business should continue to expand during the next couple years because of these trends.

SLB offers many services and products including seismic graphing, drilling, characterization, completions, subsea, production, well intervention and well testing. It also offers comprehensive worksite management solutions.

Last year was an excellent year for the US equity markets, with unemployment coming down and businesses starting to spend some of their pent up cash. Interest rates continue to be extremely low thanks to the Fed’s monetary policy.

Oil prices have remained relatively high. It seems that each time the price of oil starts to trend down, tension in the Middle East or other energy producing country such as Russia or Libya, quickly drive energy prices back up.

Here are some themes that we are seeing in the energy space with exploration and production (E&P) companies specifically:

1. Increased demand for efficiency & production maximization

2. De-risking acreage

3. Global growth in exploration and production activity

I would like to take a look at those three trends that I believe will continue to drive the energy sector and E&P spending, which is a direct driver for SLB’s services.

With the proliferation of hydraulic fracturing in shale plays, wells have been producing record initial production (IP) rates. And thanks to greater technology and operation efficiency, the cost of completing a well has come down substantially over the past few years.

SLB’s Integrated Project Management, technology and information solutions offered to customers worldwide set them apart from the competition. Also with economies of scale, and global facilities strategically placed, it allows them the flexibility and speed to better serve their customers.

In many ways, SLB is actually  a technology company operating in the energy space and is one of the leaders in this area with its Diversion Pill and Hi-Way Fracking system that allows for better IP rates. SLB’s Integrated Project Management (IPM) is also a very attractive option, since a typical well site could have as many as 70 to 80 different contractors employed per location throughout the entire process of bringing a well online.

SLB’s IPM allows an efficient, comprehensive operator to complete the entire process and lowering costs.

We are seeing a trend of undeveloped acreage accumulating on E&Ps balance sheets faster than developed acreage. E&Ps should begin to see increased pressure to “de-risk” this growing undeveloped acreage by beginning production and turning undeveloped reserves into producing acreage.

The lease structure on land is another driver to keep E&P’s developing that acreage. A typical lease will require a certain amount of production, or drilling to be completed within a certain period of time, or they could lose the lease.

We have no way of knowing this for sure, but with market share in the majority of its service and product lines, SLB should continue to capitalize on all aspects of production demand from new exploration to ultimate completion of the wells.

With growth expanding worldwide, the demand for energy will continue along with it. The U.S. Energy Information Administration (EIA) is estimating that world energy consumption will increase 56% by 2040. In the short term, shorter term, CapEx spending by E&P’s is projected to increase 10-14% to a record high of nearly $800 billion in 2014.

Yes we have had explosive production over the last 5 years as new completion technology in shale plays has opened up new reserves with higher estimated ultimate recovery per well. But just to put it in perspective, because of the rapid decline in the initial production (IP) rates, even if demand was stagnant, E&P’s would still be required to continue to explore and develop new opportunities to keep production steady.

So this, along with the global growth that we just discussed bodes well for a company like SLB, which specializes in the exploring, producing and servicing of these new and existing projects.

DISCLAIMER: The investments discussed are held in client accounts as of April 30, 2013. These investments may or may not be currently held in client accounts. Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions. Past performance is no guarantee of future results.

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Tyler Kocon
Tyler Kocon
Split Rock Private Trading & Wealth Management is a registered investment adviser based in Minneapolis. Split Rock provides access to several specialized investment portfolios. They currently operate and manage an Equity Rotation portfolio that strives to identify and understand economic and business cycle conditions and allocate funds accordingly. Split Rock also manages a North American Shale Energy portfolio that seeks to invest into the Bakken and other various major U.S. Shale plays. It invests funds according to each individual company’s strength of position and growth potential within those shale deposits.