Investor's Business Daily, August 24th, 2007
In March, oil-field services giant Halliburton HAL announced it was moving its headquarters to Dubai, United Arab Emirates.
The new digs puts the behemoth right in the middle of its fastest-growing business, providing oil-field technology services and products to develop oil and natural gas reserves in the Middle East, Africa and Asia.
Last year, the Eastern Hemisphere accounted for almost 40% of Halliburton's $13 billion in oil-field services revenue.
Many oil-field services companies have made significant inroads into Eastern markets in recent years.
The world's largest oil-field services company, Schlumberger SLB, spent years establishing itself in Eastern markets. Now 70% of its business is staked overseas.
Analyst David Rewcastle of Argus Research said there's still money to be made servicing North America. But like real estate, it's all about location.
"The big activity, the big growth, is out in the Middle East, Caspian Sea, offshore West Africa, as well as offshore China and Vietnam," he said.
New oil projects in these regions are creating opportunities for oil-field service companies.
For instance, Saudi Aramco, the state-owned oil company of Saudi Arabia, awarded Halliburton the $8 billion Khurais mega project.
"About 20 years ago that would have been Exxon Mobil doing that," Rewcastle said. "But the top oil-field services companies are edging out the majors for some of the world's biggest projects."
1. Business
Oil-field services companies make their money by servicing the exploration and production of the ultimate commodities: oil and natural gas. There is a mutually beneficial relationship between oil-field services companies and their exploration and production -- or E&P -- customers.
"Our business is following the drilling business," said Joseph Bennett, senior vice president of offshore services company Tidewater TDW. "If E&P companies are not drilling, then we're not going to create work."
The U.S. oil- and gas-field services industry is highly fragmented with thousands of companies, but only 91 are publicly traded. Most of the rest are mom-and-pop firms with a handful of employees.
The industry is labor intensive, offering a wide array of support services and equipment. They service onshore and offshore wells, rigs and platforms.
Services companies provide exploration and production, well completion and geological evaluation as well as consulting and software. The high-tech services involve reservoir imaging, monitoring and seismic surveys.
The more services a firm offers, the more valuable it is to its clientele. Schlumberger has perfected this to become the industry leader.
Other top players include Halliburton, McDermott MDR and BJ Services BJS. Top drilling-equipment makers include Baker Hughes BHI, National Oilwell Varco NOV, Weatherford International WFT and Smith International SII.
There are some mid-level players, such as Tidewater, Oceaneering International OII and Seacor Holdings CKH, which provide fleets of support vessels for offshore rigs and platforms.
They deliver drilling supplies, transport crews, tow rigs, place and retrieve anchors and assist with repairs and construction.
Support services account for about 45% of the services industry revenue. Drilling provides about 35%, and equipment manufacturing makes up the rest.
Name Of The Game: Oil-field services companies must continue to expand their product portfolio and their geographic footprint.
Those who are successful will beat out the major oil companies for the more lucrative, long-term contracts, especially overseas.
2. Market
The oil-field services industry is directly tied to E&P spending, the way a tick bird relies on a rhino.
Worldwide E&P spending is expected to rise 13% to more than $300 billion in 2007, according to the mid-year E&P spending report by Lehman Bros. The vast majority is earmarked for drilling in the Eastern Hemisphere.
Analysts estimate that proven conventional oil reserves total 1.2trillion barrels, while proven unconventional reserves top 1.5trillion barrels.
Oil-field services companies' biggest customers are the government-controlled national oil companies, or NOCs. There are about 60 national oil companies. Saudi Aramco is the world's biggest NOC.
NOCs control about three-quarters of the world's proven oil reserves, according to PFC Energy, an industry consulting firm.
These governments are hiring more services firms that offer integrated project management services rather than enlisting the major oil companies to do the work.
The services firms still aid the major oil companies, such as Exxon Mobil XOM, Royal Dutch Shell RDSA, BP BP and Chevron CVX.
But the business is increasingly shifting towards servicing and supplying state-owned oil companies.
3. Climate
When oil prices and demand were lower several years ago, the major oil companies had the upper hand when negotiating with governments controlling access to reserves, Rewcastle said.
But as the world's thirst for oil increases, NOCs are venturing beyond their borders in search of new reserves.
China and India are seeking oil to meet the needs of their fast-growing economies. China is expected to have 140 million cars on its roads by 2020, seven times more than now, according to analysts.
Most of the world's reserves are controlled by governments that restrict access to outside oil companies. Instead, governments hire oil-field services companies to manage their entire oil-field project.
"They are now supplanting the traditional role that the international oil companies used to do, like going into a country and running their oil business; such as extraction, seismic imaging, reservoir management, producing and distributing it, and even refining it," Rewcastle said.
The services companies with a global footprint have an edge on the competition as well.
With maturing reserves in the North American market and a downturn in Canada, there is a strong push for exploring reserves in the Eastern Hemisphere.
"What's impressive is the top oil-field services firms' ability to minimize margin erosion in North America in light of sluggish Canadian activity," said Stephen Gengaro of Jefferies & Co. "International demand is what's driving the bus."
Globally, the rig count rose 10% to 1,002, with the strongest activity in Africa and the Middle East, Baker Hughes reported.
Deep-water drilling is keeping the offshore markets afloat in the Gulf of Mexico. The deep waters of the Caspian Sea and the coast of West Africa also are fueling growth.
Tidewater leads the pack with the largest fleet of supply vessels. In 2001, the services firm upgraded its boat construction program to $700 million to meet deep-water demand.
The worldwide fleet of supply boats has grown about 18% since 2000. Analysts expect 194 new boats will go into service this year, up 26% from 2006.
4. Technology
The top-tier companies developed innovative technology to combat decades of neglect that left the industry with 1970s technology, Rewcastle said.
Also, with mature fields in North America, today's reserves are smaller and difficult to drill, said Frederick Lawrence, the vice president of economics and international affairs at the Independent Petroleum Association of America.
"There is no easy oil anymore," he said. "Those who spent money upgrading their technological equipment are in much higher demand."
At the top of the list is seismic exploration services, which is finding the oil and gas reserves. Schlumberger's seismic imaging is some of the world's best, said Gengaro, of Jefferies & Co. Its Q-Technology not only searches and finds reserves, but it can also tell the quality of the oil or gas.
The simple vertical well is obsolete. Now oil companies must drill at an angle. Service companies can drill a horizontal well five miles deep to find the sweet spot both on land and offshore.
The use of a MRI machine gives companies a pair of high-tech eyes while drilling, allowing them to more easily find that sweet spot 10 miles underground, Rewcastle said.
5. Outlook
With oil prices hovering around $70 a barrel, analysts are upbeat about the growth prospects for the oil-field services industry. Short of some major economical or political event, most don't see demand flattening or going down.
"As long as there is a high-priced environment, there will be people frantically willing to get the oil out of the ground," Rewcastle said.
Deep-water drilling in the Gulf of Mexico and in international waters should keep the aquatic services firms afloat.
Emerging economies, especially those in the eastern hemisphere, need more energy. This will fuel growth for services companies, who are supplanting the majors in many of these markets.
Upside: As long as the top-tier firms continue to crank out new technology they will be able to access the more difficult domestic reserves while winning lucrative projects abroad.
If these technologies diffuse down to the midsize companies, then they also can prosper.
Risks: A recession could force the price of oil to plummet and slow drilling activity. Geopolitical risks exist in Venezuela, Iran and Sudan. These regimes could face U.N. sanctions, disrupting business for any services company operating in these regions.
