With March winding down, the kickoff of earnings season won't be far behind. As one with a special interest in the energy sector, the highlight of the earnings parade occurs for me when oilfield giant Schlumberger (NYSE: SLB ) takes its turn.
The company's CEO, Andrew Gould, describes his company's most recent quarter clearly and succinctly. We expect that. But his look at macro trends in the oil and gas world is unfailingly informative. I therefore perused the transcript of his remarks at this week's Howard Weil Energy Conference. His comments, which I'd term realistically positive, obviously had a major role in shares of both his company and Weatherford (NYSE: WFT ) climbing more than 4% on Tuesday, while those of Halliburton (NYSE: HAL ) and Transocean (NYSE: RIG ) rose in excess of 2%.
We fossils will survive
Lest you buy the absurd notion that wind, solar, or a combination of the two will be meeting the majority of our energy needs any day now, Gould noted an International Energy Agency forecast that most of us readily accept: that fossil fuels will still be our dominant energy and power sources in 2035. However, it's not as widely recognized that, "To enable such growth in oil and gas supply, investment of some $450 billion is estimated to be needed every year in upstream activity for the next 25 years."
Much of the energy story will continue to involve both growth in global demand and, more importantly, the ability of supply to keep pace with that growth. Regarding that important balancing act, Gould pointed out that, "In the years following 2003, the thin margin of excess capacity, coupled with rapid price increases, led to the explosion in exploration capex from $130 billion in 2000 to $500 billion in 2008 -- a compound growth rate of over 18%."
In my sometimes not-so-humble opinion, that rate isn't likely to go anywhere but up. In that context, however, Gould observed the importance of both shifts in demand and our awareness of those shifts during just the past decade. As he said, concern about the security of energy supplies has permeated the OECD (developed) nations for the past century. But the more recently developed obsession with supply dependability that has emerged in China and India is now driving demand. "This is the first, and undoubtedly the most important shift of the last decade," he said.
A change of oily ownership
In a related area, he dealt with a phenomenon to which we in the West typically pay far too little attention: the rapid expansion of resource nationalism and the increasing importance of the national oil companies. In acknowledging the substantial differences among the NOCs, he pointed out that, "Some are major offshore operators, such as Statoil (NYSE: STO ) or Petrobras (NYSE: PBR ) , while others have mastered complex project management, such as Saudi Aramco."
In thinking about the growing importance of the NOCs -- which serve as Schlumberger customers as readily as do ExxonMobil (NYSE: XOM ) and its non-NOC peers -- I recalled sobering numbers included in a Wall Street Journal article a couple of months ago. As the Journal pointed out, as recently as the 1960s, 85% of the world's reserves belonged to the traditional oil majors (Exxon et al). Today, that share has plummeted to 15%.
A large footprint and big spending
Beyond macro supply/demand considerations, however, two keys to establishing an energy company's (read Schlumberger's) superiority to its peers lie in the benefits of a wide geographic spread and (increasingly important) technological leadership. And since Gould's primary objective at the conference was to highlight Schlumberger's position atop the oilfield services group, he said, "In terms of global footprint, our local knowledge and infrastructure (are) enormous and sustainable. We operate in approximately 80 countries, many ... for more than 70 years."
And as to the rapidly expanding importance of technology, he said that, "We invest more than $1 billion a year in product development, ranging from ground-breaking research that drives innovation to detailed engineering of our next-generation commercial products."
Schlumberger tops the bottom line
I could go on, as Gould covered a host of additional issues related to the progressively more complex world of energy. However, I'm convinced that, given the mushrooming challenges involved in finding and producing oil and gas -- more and more frequently in remote areas and in the face of geopolitical obstacles -- Schlumberger's size and sophistication render it a virtual must for Foolish watchlists. We can help you keep tabs on your companies with MyWatchlist.com, our free, personalized stock-tracking service.
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