Baker Hughes (BHI) recently released its international rig count data for December 2012. The number of rigs drilling for oil and gas worldwide (excluding the U.S. and Canada) stood at around 1,253, with the overall count remaining largely flat year over year. However, the two regions that exhibited relatively strong growth were Africa (around 30% growth) and Europe (around 20% growth).
Given that Halliburton (HAL), Baker Hughes, and Schlumberger (SLB) -- the three oil field services stocks we cover -- have a heavy exposure to the U.S. drilling market, with between 33% and 50% of their revenues coming from the U.S., the international market is becoming increasingly important for these firms as they seek to diversify revenues and reduce their dependence on the domestic market. Here we take a look at the markets that have exhibited growth over the past year and the potential they hold for oil field service firms that we cover.
The rotary rig count serves as an important barometer of activity in the oilfield services industry, determining the demand for products and services provided by oil field companies.
Offshore Exploration Drives European Drilling Growth
The rig count in the United Kingdom has also grown from 14 to 21 over the past year on increased offshore drilling. Most of the drilling activity in the U.K. is in the North Sea with growth coming from oil drilling. The U.K. has become a net importer of crude oil since 2005 and this could encourage the country to boost its drilling activity to improve energy independence. Natural gas exploration activity is also likely to see an uptick in the country in the coming years following the removal of the ban on fracking for shale gas (see also: "Schlumberger Can Gain From UK Lifting Its Fracking Ban").
Underexploited Resources and Geopolitical Factors Boost Growth in Africa
Relatively high oil prices, under-tapped resources and favorable geopolitical factors have helped boost exploration activity in Africa.
The rig count in Algeria, a member of the OPEC, rose from 33 to about 38 thanks to an increase in both oil and gas drilling. While the country's economy is dependent on the petroleum business (oil and gas account for over a third of GDP), its resources still remain largely underexploited, prompting large oil firms to set their sights on the country. Algeria holds the world's 10th largest gas reserves and, unlike oil, the production of gas is not constrained by OPEC quotas. In order to boost natural gas production, the country is beginning to focus on unconventional gas plays like shale gas and has already signed exploration deals with oil majors like Shell (RDS.A). This could provide opportunities for firms like Halliburton and Schlumberger given their experience with unconventional plays.
Libya, which holds the largest proven oil reserves in Africa, was roiled by civil war for much of 2011. During the unrest, the country saw its drilling activity practically vanish as international oil companies and oil field service providers suspended their operations. This impacted revenues and profitability of oil field services firms. However, over the last year, the country saw drilling activity rebound to pre-civil war levels with 15 rigs operating in the region as oil and gas majors and oil field service firms have been rapidly resuming operations. While Libya continues to pose significant political and security risks, the resurgent oil and gas industry will require the continued assistance of experienced oil field services companies like Halliburton, Schlumberger and Baker Hughes to efficiently harness the country's vast hydrocarbon resources.
Disclosure: No positions.