Schlumberger Analyst Day Review

By Eric Fox | February 23, 2011 AAA

Schlumberger (NYSE:SLB) used a recent analyst day to tout the breadth of services the company offers to the oil and gas industry, as well as its technological prowess in the oil services business. The company also outlined the bullish macro case for sustained oil and gas exploration and production spending over the next decade and further.


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Macro Spending
After a large drop in oil demand during the financial crisis in 2008 and 2009, demand for this commodity increased by 2.8 million barrels per day in 2010. The consensus increase in oil demand for 2011 is at 1.8 million barrels per day, and while there is enough spare capacity currently in the market to fill this need, the management of Schlumberger contends that huge increases in spending is needed to fill future demand growth. Schlumberger uses the figure of $450 billion a year in upstream spending for the next 25 years to provide this needed supply.

Oil Service Breadth
Schlumberger is the number one or two in market share in a variety of oil service sub segments, ranging from services needed during exploration to those critical for drilling and completion. The company is committed to this market dominance and has made several acquisitions when needed to keep pace in oil services. The acquisition of Smith International was the latest of these acquisitions, and along with increased market share, the company estimates that it will achieve pre-tax synergies of $300 million.

Technology
One practical example of the use of Schlumberger technology to get more oil and gas out of the ground was provided by one of the company's customers. Petrohawk Energy (NYSE:HK), which is active in many onshore unconventional resource plays in the United States, touted the use of Schlumberger's Hiway Frac product.

Petrohawk Energy used this hydraulic fracturing process on a limited number of wells in the Eagle Ford Shale, and reported an increase in reservoir volume and permeability. The company reported production increases ranging from 32% to 37%, and estimated ultimate recovery increase from 25% to 90%. Petrohawk Energy is now fracturing all of its wells in the Eagle Ford Shale using this process.

The use of technology to improve recovery is characteristic of many shale plays in North America, and is part of the manufacturing business model employed in these areas. SM Energy (NYSE:SM) is also active in the Eagle Ford Shale and reported a 25% improvement in drilling times in the most recent quarter.

This improvement is not just confined to oil bearing formations. Southwestern Energy (NYSE:SWN) has consistently improved its natural gas operations in the Fayetteville Shale since entering the play. The company has reduced the time to drill an average well here from 17 days in 2007 to 11 days in 2010.

Five Year Plan
Schlumberger laid out a multistep plan over the next five years to guide the company. These steps include growing market share in various oil service lines, growing earnings per share faster than revenue, establishing the highest margins in the business in North America and continuing its strong share buyback and dividend policy.

Bottom Line
Schlumberger is optimistic about the future growth in oil and gas spending despite the drop in upstream spending during the financial crisis. The company also believes that its market dominance and technology advantages will make it a prime beneficiary of this spending. (For related reading, also check out How Does Crude Oil Affect Gas Prices?)



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