The oilfield services industry is looking ahead to better times as climbing oil prices and a strong outlook for global upstream capital spending bode well for the demand for the various services that they provide.
We believe that Schlumberger (SLB), the world’s largest oilfield services company, is likely to be one of the biggest beneficiaries of these trends given the company’s geographically diversified presence and its strong relationships.
Upstream Capex Outlook Looks Strong, But North America Lags
Activity in the upstream oil and gas space is largely driven by the outlook for oil prices, which in turn influence the capital expenditures of oil companies. Higher oil prices improve the return on investments for projects and increase the incentive for oil and gas companies to participate in more high risk and challenging plays. Crude prices have been seen some stability over the last few years with Brent prices largely ruling at above $100 per barrel while prices have actually increased to nearly $115 per barrel presently on the back of geopolitical uncertainties. Worldwide oil demand is also expected to see some moderate growth rising from an about 91 million barrels per day (MMb/d) in 2013 to close to 93 MMb/d by 2015.
Global exploration and production capital expenditures are expected to grow by around 18.7% in 2013 to about $850 billion.  Additionally, the outlook for global drilling and completion spending, which is largely directed towards oilfield services, is expected to grow from roughly $380 billion in 2012 to around $470 billion by 2015.  In the near term, a large portion of spending is likely to come from international markets, particularly the Middle East and Asia Pacific. However, North America is expected to remain relatively lackluster in the near term as oil and gas companies have been holding back on expanding capex as they focus on improving efficiencies of their drilling and production activities instead. However, the outlook for the region is expected to improve as the the United States is expected to become the worlds largest oil producer towards the end of this decade.
Schlumberger Could Be The Biggest Beneficiary
In the near term, we think that Schlumberger stands to benefit the most from growing global spending given that it’s operations are geographically diversified. Unlike its principal rivals, Halliburton and Baker Hughes who derive more than half their revenues from North America, Schlumberger derives less than one-third of its revenues from the region. Additionally, the company has mentioned that it has been focusing on a more favorable activity mix such as deep water, which could imply that its global operating income will actually exceed the growth of global exploration and production spending. Additionally, Schlumberger has strong relationships with national oil companies (NOC). (Related read: Do National Oil Companies Hold The Key To Schlumberger’s Future) In recent times, Schlumberger has seen its share of revenues from NOC’s steadily increase. We believe that this is a positive trend since NOC’s are likely to account for a bulk of upstream capex going forward as they control nearly 85% of the world’s oil reserves. 
We have a $88 price estimate for Schlumberger, which is slightly ahead of the current market price.
Disclosure: No positions