Schlumberger: The world’s largest oilfield services firm has decided
that it should take an ownership stake in upstream oil and gas production,
rather than simply provide the services for doing so. The new strategy is being
closely watched as a potential model for the major oilfield services companies
that have drilling prowess but struggle with lackluster activity in a world of
$50 oil.
Schlumberger has decided to put billions of dollars on
the line to become an oil producer, not just a drilling servicer. Typically,
Schlumberger and its peers provide equipment, or seismic testing, or well
casing and fracking services, or the analysis of oilfield data, etc., while
their clients—oil producers—have ownership over the oil and ultimately sell it
into the market.
By buying ownership into oilfields, Schlumberger can have
“a say in drilling decisions, oilfield management and even on hiring other Schlumberger
units for service contracts, the company has told investors,” Reuters reports.
And as Reuters explains, by controlling a drilling project, Schlumberger can
carry out the entire project rather than merely being a bidder on the variety
of narrow jobs that go into oil production, an approach that often means it
only wins some contracts on a given project while losing out on other bids to
competitors.
The new ownership model for Schlumberger is not without
downsides. Under its conventional servicer model, Schlumberger gets paid to
complete a well, for example—money that would come in whether or not the
broader project ended up turning a profit. In that sense, it was much safer and
more predictable. But as the owner and operator, Schlumberger could expose
itself to a lot of risk if a project doesn’t turn out well. The flip side is
that it can make a lot more money if everything goes according to plan.
Although it’s still early, there’s some evidence that the
approach is bearing fruit. The return on capital employed for Schlumberger
Production Management (SPM), the name of Schlumberger’s oil production unit,
was seven percent higher between 2011 and 2016 than the rest of the company’s
units, according to Market Realist.
But its recent $700 million investment in a joint venture
on oil exploration in Nigeria illustrates the risks involved. Reuters says its
partnership with the Nigerian National Petroleum Corp. would need oil prices to
trade between $50 and $60 per barrel to earn a 20 percent profit. Brent crude
trades at the lower end of that range and some analysts do not see it moving closer
to $60 in the near future.
Also, Schlumberger wrote down hundreds of millions of
dollars in an Eagle Ford project that went sour when oil prices crashed in
2014.
Another issue: Some now see Schlumberger somewhat
competing with its own clients, since it will also be an oil producer. It may
seem a bit awkward since Schlumberger depends on those other oil producers for
the bulk of its business. Schlumberger has downplayed the prospect that it is
competing against its clients.
There are a few significant ramifications from
Schlumberger’s new approach. First, it turns Schlumberger into a sizable oil
producer in its own right. Reuters says that Schlumberger had 230,000 bpd of
oil and gas production under its control at the end of last year, which puts it
on par with some of the largest shale producers in Texas.
More importantly, it could lead to a change in strategy for
the entire oilfield services industry. By taking stakes in oil projects,
Schlumberger ends up boxing out its competitors by “winning” all of the
contracts for oilfield services on that project. Reuters cites a project in
Morocco with a small UK-based natural gas producer. Sound Energy PLC gave all
the services contracts to Schlumberger if the latter bought a 27 percent stake
in the project. By putting up the money, Schlumberger earned the rights to 27
percent of the earnings of the project, while also carrying out all the
services as well. Sound Energy brought on a partner with world-class drilling
capabilities while also reducing its financial risk.
But importantly, the deal prevented Schlumberger’s traditional
rivals in the oilfield services industry from having the ability to bid on any
of the service contracts.
Analysts are closely watching to see if Schlumberger’s
nearest competitors, like Baker Hughes or Halliburton, follow suit. That will
likely depend on how lucrative it turns out to be for Schlumberger. Up until
now, it seems to be a mixed bag for the oilfield services giant.
Source: By Nick Cunnigham - OilPrice