Leading Oil services company Schlumberger gave results recently which beat estimates but were a little bit underwhelming in the outlook. Before I go into more detail, I should point out my view on Oil services companies.
I see them as correlated plays on the current price of oil. In my experience they have a higher correlation to spot oil prices than exploration and production companies do. This is because the marginal increase in demand for their services comes from the short to mid term price movement in Oil. With regards exploration companies, they are more determined by longer term considerations because-even with substantive reserves-they don't realise those reserves at current prices. For the integrated majors, oil prices can be damaging to some aspects of their downstream business as high prices could curtail demand and margins.
The point of looking at Schlumberger is to discern some industry outlooks that could give clues as to which oil services stock you favour, in order to manifest a viewpoint of higher prices. I've made a few bullet points from the results and conference call
- Co focused on Smiths integration
- Pricing and margin pressure seen in the second half
- Strong activity in oil field services in N America
- Oil field services strong in North Sea,West Africa, Middle East and Asia
- Weakness in Mexico oil field services
- Technical successes scanning,reservoir production and drilling offerings
- Strongest 2011 growth in deep water seen coming from West/East Africa
- Demand recovery not as strong with natural gas
- Increased supply of unconventional gas in the US and liquefied natural gas (LNG) worldwide seen as limiting price growth
Short term, Schlumberger was not optimistic that a 'major return' to work would come in the Gulf of Mexico. The markets that contain a significant amount of uncertainty are Iraq, Russia, Mexico and Brazil. Although I suspect the risks are on the upside here.
I think gas services continues to look weak and the outlook wasn't great. Schlumberger mentioned possible margin pressure in the second half, but this will largely be determined by the price of oil. With regards Oil services stocks, it suggests focusing on oil at the expense of gas plays.
I would be a bit cautious with the stocks that rely on new activity, such as Transocean. Furthermore, according to Schlumberger, it will be late 2011 or 2012 before activity picks up in deep water Gulf of Mexico work. Again, I would stay clear of these plays.
Overall, a pretty balanced outlook for 2011.