Over the past couple of months companies in the oil services sector (OIH) have had a noticeable price decline. Schlumberger N.V.'s (SLB) share price has declined just under 10% from its highs around Halloween. There are some of the reasons for this seasonal disruption but the overall trend still remains bullish. Is this an excellent time to pick up shares in Schlumberger? I believe it is.
Schlumberger NV is a supplier of technology, integrated project management and information solutions to customers working in the oil and gas industry worldwide.
Why the Buying Opportunity?
Currently there are a some factors putting pressure on the stock price. On a domestic front the North American onshore market has a "glut" of supplies. On an International front there have been some issues in Iraq while on a global front volatility in oil prices have all added up to a price reduction in Schlumberger's stock.
On the domestic front Schlumberger's North American operations including its pressure pumping line are experiencing downward pricing pressure. This downward pricing pressure is due to the overall North American utilization rate being oversupplied by ~20%.
In a recent statement, Halliburton CEO Dave Lesar stated:
"The North American market continues to have excess supply of pressure pumping equipment, and although this is improving, we anticipate pricing pressure will continue as contracts review during the next quarter or so."
On the International front, a "security incident" located in southern Iraq created a temporary shutdown of its operations. Because of this shutdown Schlumberger Ltd expects a reduction of fourth-quarter profits by ~2%.
Speaking at the Cowen and Co Ultimate Energy Conference, Schorn said "the shutdown would have an impact of 2 cents to 3 cents per share for the quarter."
On a global front, another reason for the current price volatility is the decline in oil prices this fall. As the price of oil has shown some weakness so has Schlumberger's stock price.
In the three-year chart above, you can see the correlation between iPath S&P Crude Oil Total Return Index ETN (OIL) and Schumberger's share price. As the price of oil has displayed weakness over the past few months so has Schlumberger's stock price.
All the factors listed above have created a stock price decline of ~10% in the past couple of months.
Adding to the reasons listed above, a 20-year seasonal average supplied by equity clock indicates the fall months tend to be the weaker months for Schlumberger N.V. when compared to the S&P.
Catalysts for Continued Growth
1. Deepwater Drilling Market
Even though Schlumberger has many revenue streams, increased E&P spending in the deep-water and ultra-deepwater regions around the world will be a key driver for future growth in revenue, earnings and the stock price.
Deep-water and ultra-deepwater exploration and drilling have shown a remarkable increase over the past few years. This is due in part to the development of new technologies, which have reduced operational costs and increased safety. These technological advancements have also increased a company's ability to find and access more reservoirs that will produce high-quality production wells.
Schlumberger NV, which is a leader in the development of new technologies for deep-water drilling, has pushed the envelope with its engineering and technological advancements. Many of these advancements have opened up a greater amount of opportunities in areas such as the Pre-Salt region off the coast of Brazil, the Barents Sea in Norway and the U.S. Gulf of Mexico.
As more advanced technologies have created opportunities, that in turn has reduced costs and increased safety, it has become economical for companies to pursue deep-water reserves. Major E&P companies such as Exxon (XOM), Chevron (CVX), BP p.l.c. (BP) and Royal Dutch Shell (RDS.A) (RDS.B) have increased their presence in deep-water regions. Exxon is expecting deep-water projects to account for 8% of its new source production over the next decade. Chevron is expecting deep-water projects to account for 40% of its new source production. BP p.l.c. is banking on the most as it is expecting 52% of its new source production to be from deep-water reserves over the next 10 years, while Shell is more reserved in that it expects 25% of new source production to come from deep-water projects. To support their deep-water growth, these major E&P companies along with others have significantly increased their deep-water Capex spending outlook over the next four years.
Over the next four years, It is estimated that global growth in the offshore E&P sector will increase 8% to 10% YOY. Leading the way in E&P spending is Brazil, which is anticipating $250 billion to be spent on the development of its offshore reserves. Second in E&P spending is Norway, which is expecting $220 billion to be spent on the development of the North Sea, Norwegian Sea and the Barents Sea. The region that Schlumberger is focusing on is the U.S. Gulf of Mexico. Within the U.S. Gulf of Mexico, E&P spending is expected to be around $190 billion over the next four years.
2. North American Drilling Market / Technological Improvements
Even though the North American pressure pumping (fracking) market has suffered as service companies brought a glut of supply on board, the long-term outlook is positive as the U.S. is focusing on becoming self-sufficient in energy by 2030. As the U.S. is looking at tight oil and shale gas as a one of the main sources for its oil and gas production this increased production will absorb the current glut of equipment in the market.
According to the EIA the U.S. has plenty of oil and gas reserves. They estimate at current consumption rates, the U.S. alone has around 92 years of technically recoverable natural gas reserves. Technically recoverable reserves consist of "proved reserves" and "unproved resources." As the U.S. has enough oil and gas to sustain itself for many years, this will open the door for many investment opportunities. To capitalize on these opportunities Schlumberger has created the "HiWAY" fracturing service. As the "HiWAY" fracturing service is the first of its kind, it creates stable channels with the fractures. The HiWAY fracturing service pumps proppant in pulses to create stable infinite-conductivity flow channels within the fractures thus creating a more stable frack. This system has shown to improve productivity by ~20%, while decreasing the amount of water and proppant used in the process by ~40% and ~60%, respectively. Because of the results of this innovation Schulmberger's technologies were deployed for BHP Billition (BHP), Marathon Oil (MRO) and Swift Energy (SFY) in the Eagle Ford Formation.
As Schlumberger's stock price has declined by close 10% in the last couple of weeks, the reasons for this decline are temporary. This temporary decline has provided an excellent opportunity to invest in a solid company with many forward catalysts. With Schlumberger's strong presence in North America coupled with the growing outlook for offshore deep-water development, it is my opinion this is an excellent time to purchase the stock. In an article I recently published entitled "Schlumberger: Look for $105.00+ this Spring" I estimate a price target of $105.88 for 2014.