The high-tech exploitation of North American shale is boosting the oil and gas production of the United States, which has motivated China to do the same with its reserves. The world’s second-largest economy is aggressively developing its vast storehouse of homegrown shale energy, which is good news for oilfield services provider Schlumberger (SLB).
Schlumberger has deep roots in China, where established relationships and a proven track record are crucial to winning business.
The Middle Kingdom has recently discovered huge oil plays, and Schlumberger is poised to get the contracts to develop them. This work in China supplements the company’s other work around the globe and also cushions it against today’s falling oil prices and economic volatility.
Schlumberger’s latest operating results underscore its entrenched position in the energy patch — and its robust prospects. The company reported yesterday that third-quarter profit increased 14% on a year-over-year basis, as North American and overseas demand accelerated.
Schlumberger Earnings
The company reported earnings of $1.95 billion, or $1.49 per share, compared to $1.72 billion, or $1.29 per share, in the same quarter a year ago. Revenue increased year-over-year by 9% and reached $12.6 billion. Wall Street had anticipated lower EPS of $1.46; revenue was in line with expectations.
The stellar Schlumberger earnings were driven by greater demand in Canada and the United States, as well as growing overseas business.
In the third quarter, Schlumberger’s North American Area revenue spiked 18% to $4.3 billion. International revenue reached $8.3 billion, up 5% year-over-year. Middle East & Asia Area revenue of $3 billion was flat sequentially, but production declines in war-torn Iraq dragged down performance of this segment. In future quarters, Asia — especially China — should prove a long-term revenue bonanza.
North American shale isn’t the only energy boom on the planet. China is home to mammoth shale reserves, and the country’s economic planners are set on tapping it. To realize these goals, China will require the expertise of seasoned oilfield service companies. Schlumberger is at the head of the line.
With central offices in Houston and Paris, Schlumberger’s services include offshore drilling and hydraulic fracturing, or “fracking,” a process under which water, sand and chemicals are injected underground to tear loose hydrocarbons that are trapped within shale rock.
Schlumberger is exploiting the growing pervasiveness of fracking, which has made North America an energy powerhouse again and is on track to making the U.S. energy self-sufficient. It’s a windfall that makes the energy-hungry Chinese salivate.
SLB Stock Looks Great
Schlumberger generates two-thirds of its revenue outside of North America, the highest ratio among its top competitors. The company is currently helping increase the production of shale gas in China, which sits on an estimated technically recoverable reserve of more than 1,200 trillion cubic feet of gas — the most of any country in the world. Shale gas now represents only 1% of China’s natural gas production, which points to enormous future room for growth.
Schlumberger already enjoys a well-developed presence in China. The company operates in major basins in the Central and Western part of the country and has enhanced productivity from shale gas fields in the Ordos Basin, the second-largest in China.
And yet, Schlumberger’s trailing 12-month price-to-earnings (P/E) ratio is only 18.2, a good value compared to the trailing P/E of 24.5 for its industry of oil and gas equipment and services. Schlumberger is proving that when it comes to shale, North America can feel China’s hot breath on its neck.
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As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
