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  • Roger S. Conrad

For the Conservative Investor

By Roger S. Conrad on Sep. 14, 2013

Schlumberger (NYSE: SLB)  — Coverage Universe

With a market capitalization of $96 billion, Schlumberger  is the largest of the Big Four oil-field services companies and more than three times the size of Halliburton (NYSE: HAL). The firm is the No. 1 services outfit in every major oil- and gas-producing region, with the exception of North America, where it ranks second to Halliburton.

Within the industry, Schlumberger is known for its commitment technological innovation, strong presence in international markets relative to its peers and leadership in exploration-related services. With the North American market for pressure pumping continuing to suffer from margin compression and reduced demand, Schlumberger stands to benefit from its limited exposure to this business line.

At the same time, the company is the best-positioned among its peers to profit from accelerating drilling activity in the deepwater Gulf of Mexico and a tightening supply-demand balance in international markets.

We also like the long-term potential of OneSubsea, Schlumberger’s recently formed joint venture with Cameron International Corp (NYSE: CAM), that will focus on developing integrated equipment and service solutions for seafloor installations. Now that this partnership has officially closed, we expect both management teams to be more forthcoming about the unit’s strategy during their respective companies’ conference calls.

Although the joint venture with Cameron International will get all the attention in Schlumberger’s conference call to discuss second-quarter results, investors shouldn’t overlook the oil-field services giant’s partnership with Anton Oilfield Services (Hong Kong: 3337) to provide integrated project management to China’s burgeoning shale-gas industry. This joint venture gives the firm a foothold in what could prove to be a lucrative growth market over the next decade.

And in mid-April 2013, Schlumberger inked a unique deal with Forest Oil Corp (NYSE: FST) to develop the latter’s acreage in the Eagle Ford Shale. Under the agreement’s terms, Schlumberger will pay $90 million in drilling costs in exchange for a 50 percent working interest in the upstream operator’s acreage. The two parties will split all drilling costs and proceeds after Schlumberger’s initial $90 million outlay is exhausted.

Management emphasized that this move does not represent a new contract structure that the firm will pursue. Rather, this one-off agreement gives the firm the opportunity to showcase the benefits and superior efficiency of its advanced shale oil and gas solutions in an effort to drive adoption among cost-conscious North American producers, many of which prefer inexpensive solutions.

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    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor