While being in the oil-and-gas industry isn’t a guaranteed way to make money, it certainly doesn’t hurt. But being an ancillary provider? That’s where some of the truest and most reliable riches lie.
Schlumberger NV (SLB) doesn’t actually sell oil at retail, but they do just about everything leading up to that. The company specializes in what the industry calls “upstream” activity, which involves looking for oil, drilling for it, and operating wells. If it happens before the black gold is ready for the pipeline, Schlumberger does it. The better recognized oil and gas firms, your Exxon Mobil Corp. (XOM) and your Royal Dutch Shell plc (RDS-A), will hire Schlumberger to perform the mundane tasks such as figuring out which advanced drill bits and platforms are best suited for plowing through a particularly challenging bit of rock or sand. It might not be glamorous work, but it’s vital to the greater petroleum industry. And extremely, fantastically remunerative. Rotating cutters, repeat formation testers and radial probes are of interest to few people beyond petroleum engineers, but those implements and the expertise of the people who know what do to with them contribute mightily to keeping Schlumberger well in the black.
In a business populated by some infamous names (e.g. Halliburton Co. [HAL], Transocean Ltd. [RIG]), Schlumberger has largely managed to stay out of the non-financial news headlines throughout its 88-year existence. And by acquisition and natural growth, has evolved into the biggest company of its kind – with a market capitalization in the neighborhood of $132 billion. The company has also paid consistent and largely increasing dividends since 1957.
Schlumberger (that’s shlum-bear-zhay’: its founders were French, not German) moved its base to the United States within a few years of the company’s 1926 inception. Currently headquartered in Houston, Schlumberger derives the large majority of its revenues outside the U.S. and the Gulf of Mexico. Fully 73% of Schlumberger business is conducted in other markets. By going where the resources are, Schlumberger operates in countries of dubious political stability – Cuba, Sudan, Iran, both Congos, etc. – but still manages to enjoy profit margins in the 15% range, which is more than solid in the competitive market of oilfield services. (For related reading, see: Schlumberger Leads The Way, Like It Usually Does.)
Revenue Still Growing
International revenue increased $3.2 billion last year, the corollary to which is that U.S. revenue growth was practically static. Last year’s modest $400 million gains in North American revenue were almost entirely attributable to activities in Canada and the Gulf of Mexico.
Schlumberger has three major business divisions: production (pumping, storage, protecting watersheds), which accounts for about 35% of total revenue; drilling, at 38%; and reservoir characterization (assessment, imaging, software – the clean-hands stuff). Revenue growth was uniform among the divisions last year, increasing by 8%, 9% and 10% respectively. Geographically, things are less balanced. Growth was by far the largest – 23% – in the Middle East and Asia. (For more, see: A Guide To Investing In Oil Markets.)
North America Profit Still In Front
But those are revenue numbers, not income. Schlumberger might have reached the concave part of the sales curve with regard to North American operations, but foreign profit numbers still have a way to go to catch up with domestic ones. Pretax operating income in the United States accounted for 30% of the total, meaning that every dollar of U.S. revenue contributes a penny or two more to net income than does every corresponding dollar from elsewhere.
From Evaluation To Extraction
What’s the explanation for the activity on the margins? Let’s look at it sector by sector. On the reservoir characterization side, Schlumberger attributes most of the increases to software sales and licensing. Among the myriad businesses Schlumberger owns is WesternGeco, a U.K.-based company that analyzes seismic data and surveys land. Is that oilfield you spent hundreds of millions of dollars on worth developing? Rather than attempt to answer the question independently, most oil-and-gas conglomerates will hire a Schlumberger subsidiary before committing money to the project and risking loss.
On the drilling side, decreases in pretax profit for the most recent fiscal year were the only blemish on an otherwise stellar companywide report card. One of the few places where drilling profits did increase was in Schlumberger’s M-I SWACO operations. M-I SWACO is yet another subsidiary, one that specializes in drilling fluid systems. (Those boreholes don’t penetrate the Earth’s crust all by themselves. You need liquid or gaseous agents to keep things flowing.)
As far as production operations go, Schlumberger’s profit increases come mostly from the North Sea and off the Angolan coast. That’s where the company implements its well control and lift systems, necessary for extracting oil out of those hard-to-reach places, such as under several cubic miles of inhospitable seawater. Schlumberger increased its production in said areas over the past year, enough to compensate for lowered material prices. (For related reading, see: Oil And Gas Industry Primer.)
The Bottom Line
The genius of Schlumberger’s business – serving the petrochemical multinationals peripherally, rather than laying claim to the hydrocarbons themselves – is that it’s largely unsusceptible to market caprices. Glut or shortage, Schlumberger’s services are still indispensable to an industry of profound importance. Let the companies with their names on the tankers and the service stations deal with price instability. Schlumberger’s figured out a way to transcend that problem, while simultaneously staying quietly bankable and treating shareholders to some of the best and most consistent returns on Wall Street.