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New Tendencies in Oil & Gas E&P: When the Leading Geo Struggles
Posted by: Vanin Aegea (IP Logged)
Date: October 22, 2013 10:31AM
When looking at the oil and gas industry from outside, one ignores the sheer size and number of participants. The most common image is the market giants like Chevron, Shell and BP fighting over every oil well and customer, but the painting is a whole lot more complex because many of the enabling firms do not make the news. In this case, I will look at the two largest oil service companies, Schlumberger NV (SLB) and Halliburton Co (HAL), in order to find out if they stand as good long-term investment options.
The Charm of Market Domination: Business Innovation
During the second quarter, Schlumberger reported performance improvements, in great part due to international exposure and a reviving Mexican Gulf. Results for the third quarter continue the outperforming trend, in the back of increasing revenues in North America. Also, the company has benefited from lower raw material costs. Hence, the company has been able to curve changes on exploration and production spending patterns during the last two quarters.
Schlumberger´s positive forward outlook is based primarily in its wide product portfolio, one of the largest in the industry. The firm is expecting to continue seeing a raise on the sale of products related to offshore deepwater drilling and non-conventional oil and gas activities. Another relevant characteristic is the company´s great international exposure and leading market positioning among several geographies, making it a very well-suited partner for most oil projects. Last, the company´s software platform has scared competitors away, forcing them to avoid direct confrontation for market share.
The accumulated expertise about the oil and gas business granted Schlumberger the opportunity to address bigger issues than its peers. In other words, the company can study and present industry patters in a more comprehensive way, offering clients additional benefits. For example, the firm has identified the increasing technical and management complexity of projects as the reason behind the loss of billions of dollars in overruns and delays. In the same vein, the business has developed a new approach to projects, placing a greater emphasis on a collaborative approach to the business, while leaving procurements on the sidelines.
Financially, Schlumberger is strong, but an eye should be kept on debt. Trading at 19.9 times its earnings, the stock is currently packing a 16% discount to the industry average. Additionally, gurus remain bullish about the stock and Dodge & Cox, which has the largest position of all gurus, increased its holding by 15% during the last quarter. Steven Cohen also made an interesting investment, when raising his position by over 140%. Last, I share their bullish sentiment due to the firms dominant market positioning but, most importantly, because management has identified market trends and acted quickly.
Leading Geography Curtails Overall Performance
Since Halliburton is less than half of Schlumberger’s market size, I cannot say that direct competition exists. Hence, Halliburton’s opportunities often do not lie in the same geographies as market leader Schlumberger. For the same reason, PEMEX´s announced reforms offer an important chance for growth to Halliburton. Additionally, the Mexican Gulf continues to see a notable growth of offshore deepwater drilling as costs continue to decline and production safety measures improve.
Looking forward, an important characteristic for Halliburton is international exposure. Growth is most expected in the Latin American region related to a higher demand for services related to growing shale development opportunities. Additionally, the company continues to be present at all the major oil producing regions and ranks among the top three services and products offered. International presence has been facilitated, and is expected to continue, thanks to the development of strong and long-lasting relationships with private and publicly owned oil and gas companies.
During 2013, Halliburton has made great improvements concerning performance of its activities in the North American region. This is a major step forward since the company holds a dominant position in the market, and poor performances there affect overall performance. So far, the firm has remained ahead of market preferences. In other words, the company recognized that higher activity in North America oriented towards higher well quantity, not quality extraction. In turn, management was able to adapt its fleet to market preferences, while at the same time reducing deployed equipment, fleet maintenance and crew size, and improving well efficiency.
The balance sheet for Halliburton is strong, but I would keep an eye on a rising debt. Trading at 26.6 times its trailing earnings, the stock currently carries an 11% premium to the industry average. Also, the gurus holding the largest position are new investors, having reached leading position through the last two quarters. Sales have also abounded in the last quarter, and I share that pessimism. My sentiment is mainly based on the fact that the most important region for the company, North America, has not fully recovered.
Taking the time to observe these companies offers an important insight in regards to changing trends at the oil and gas industry. I feel that Schlumberger has identified market tendencies and was able to act upon them because its leading geographies were not troubled. Additionally, gurus have displayed a constant interest for the stock, and have progressively grown their holdings.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.
Guru Discussed: Dodge & Cox: Current Portfolio, Stock Picks
Stocks Discussed: SLB, HAL,