Published: July 20 2008 20:01 | Last updated: July 20 2008 20:01
The big winners of high oil prices are not the international oil companies being criticised by politicians for their enormous profits, but rather the oil services companies that the majors rely on for equipment and labour.
Wood Mackenzie, the energy consultants, say that over the past three years, large oil service company revenues have on average tripled, with net margins rising even higher, outperforming the far better known majors, ranging from ExxonMobil to BP.
And analysts expect this to be another solid year for companies such as Schlumberger, Baker Hughes and Transocean, given the rush to develop oil and gas assets amid record energy prices. Quarterly results are supporting that analysis.
On Friday, industry leader Schlumberger reported revenues of $6.75bn for the second quarter, up from $6.29bn in the previous quarter and $5.64bn in the second quarter of 2007. Other results are scheduled to trickle out over the next few weeks.
“There is a huge demand for equipment and services and many areas are pretty much at maximum capacity,” says Colin Lothian, senior cost analyst at Wood Mackenzie. That has enabled the industry to push up prices. The surge in demand for oilfield services started with the rise in oil and natural gas prices several years ago and the string of record energy prices in recent months looks set to increase this demand still further.
“Certainly this is a services sector boom time,’’ says Mr Lothian. But he notes that the service companies are also experiencing a substantial rise in base costs, which is affecting margins.
Barclays Capital says in a recent report that offshore drillers remain the most lucrative nook in the services arena.
It notes that 120 new jack-up and semi-submersible rigs are reported to be on order, with about 40 scheduled for delivery in 2008, which may affect the balance between supply and demand.
Yet even if more supply comes on line, signs are that demand will continue to grow. Barclays says the tide in North American land drilling weakness has begun to turn, with several companies stating activity will improve because of the run-up in natural gas prices.
Natural gas still represents about 80 per cent of US drilling activity and all signs are that that activity will continue to grow.
Barclays says the active natural gas rig count rose to 1,530 in the last week of June, the highest since gas-specific record-keeping began in 1987.
Yet analysts say the oilfield services companies poised for the biggest profits are those with an international presence, given that the national oil companies that control more than 80 per cent of the world’s oil reserves have begun shutting out the middleman – the big international oil companies – to do some oil and gas development themselves. However, they still need the equipment and talent held by the services sector and are hiring them directly.
Barclays says that oilfield services are “at a premium”, with international opportunities driving growth. Schlumberger, which it calls the “giant of oilfield services”, has products covering the gamut of oilfield services, and is diversified, with North America accounting for only 22 per cent of its total operating income.
Barclays notes that Halliburton, the other giant in the sector, is shifting its relatively high exposure to North America to international markets, having relocated its corporate offices to Dubai in 2007.
Of the contract drillers, Barclays says that Trans-ocean has less than 12 per cent of its rig fleet in the US and that Noble is also internationally diversified, with only nine of its 62 rigs situated in the US Gulf of Mexico.
“Demand for oilfield services continues to accelerate in both established and new geographic markets,” says Robin Shoemaker in Citi Investment Research’s latest report on the sector. “We believe that the industry upturn is still in its early to middle stages.”
Citi has “buy” ratings on Schlumberger, Halliburton, Cameron International and National Oilwell Varco, whose earnings growth it expects to be above-average because of innovative technologies, focused acquisition strategies and targeted expansion into new geographic markets.
Citi notes that the Oil Services Index rose 267 per cent from January 1 2004 until June 20 2008, while the S&P 500 advanced by only 19 per cent.
“A spotlight has been shining on the oil services stocks for four and a half years, and some investors are wondering if the attention continues to be warranted,” Citi says in its report. “Our view is that as investors see more evidence of strong market conditions through 2010 and beyond, they will conclude that the shares of many oil services companies are undervalued.”
