Play Iraqi Oil Development With Oil Service Companies

By Eric Fox | January 19, 2010 AAA

While most investor attention has been focused on which exploration and production companies have been granted concessions to explore and develop Iraqi oil and gas fields, the big winners may be the oil service companies that will reap billions of dollars in revenue to help assist this work.

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Iraq has awarded nearly a dozen contracts to develop and increase production from its underdeveloped oil fields with a plan to boost production from 2.4 million barrels per day currently to 7 million barrels per day.
Companies Benefiting From The Increased Activity
(NYSE: HAL) will be one of these companies benefiting from the increased activity. During the company's third quarter of 2009 conference call held in November, CEO David Lesar expressed optimism about the potential business, but he tempered his message with caution about the contract timing.

"It certainly is a market that has a lot of reserve base that will support, I think, a large and diversified oil services industry going forward," said Lesar. But he added, "I really don't see that we will have a significant revenue stream out of there certainly for several years. We will have revenue this year, we'll have more revenue next year, but it's not really going to be meaningful, I don't think, for a couple of years."

Schlumberger (NYSE: SLB) is also gearing up for expected work in 2010. CEO Andrew F. Gould said during a recent conference call, "I am very happy with the progress of putting the infrastructure in place. And if several multi-hundred million dollar bids emerge (in Iraq), we will be in a position to answer them."

Contract For Drilling And Completion Services
Weatherford International
(NYSE: WFT) is one of the few oil service companies to publicly announce contracts to work in Iraq. In May 2009, the company won a $224 million contract for drilling and completion services in the Buzurgan oil field.

During Weatherford's most recent conference call, CEO Bernard Duroc-Danner said he expects business in Iraq to amount to $300 million to $400 million in revenues in 2010. "Iraq is going to be a very large market," he added.

Few Offshore Areas To Explore
Investors should note that Iraq has very little offshore area to explore, since it has a limited coastline in the Persian Gulf. This would preclude companies that lease offshore rigs, like Rowan (NYSE: RDC) or Transocean (NYSE: RIG), or offshore-oriented service companies like Cameron International (NYSE: CAM) or FMC Technologies (NYSE: FTI), from benefiting from onshore area development.

Another advantage of investing in the oil service companies is that they are the targets of much less political heat than the major oil companies, which are typically viewed by the government and citizens of whatever country they are operating in as trying to "steal" the national resources. This attitude can lead to disadvantageous contract terms for the oil majors or outright expropriation of assets.

It Doesn't Matter Which Oil And Gas Companies Get The Leases
Development of the Iraqi oil fields over the next decade will generate billions of dollars in revenues for the oil service companies, no matter which international oil and gas companies are awarded the leases. Investors should look for the oil service companies best positioned to benefit from this onshore development. (Learn about factors that affect oil prices in our article, What Determines Oil Prices?)

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