The Oil Services Industry Is Changing, and These Companies Are Set to Benefit

As oil companies cut costs, Schlumberger is set to benefit.

May 1, 2014 at 8:39AM

As oil companies start to rein in costs, oil services companies are being forced to change. While costs are being cut, however, there is still a significant amount of drilling and exploration taking place.

So, to lower costs and maintain high levels of exploration activity, oil companies are now bringing on one contractor for the whole project, asking for standardized solutions where tailor-made designs would have been commonplace in the past.

Norway's Statoil (NYSE:STO) was one of the first majors to ask its contractor to drop costs. Statoil told Aker Solutions (NASDAQOTH:AKKVF) to cut costs by 30% for the design of Statoil's Johan Sverdrup oilfield, a North Sea giant with up to 2.9 billion barrels of recoverable oil present.

To come up with savings of this magnitude, Aker had to change the way it operated, combining work for another field and using project designs that had worked with another project, rather than starting the design process from scratch as per usual.

Aker's solutions could save Statoil up to $900 million of the first stage of the North Sea project, great news for Statoil as the company is able to cut costs while still growing production.

Actually, this project is also good for Aker as the company is able to show what it can do at a low cost, building the company's reputation for low-cost, high-quality projects.

The big players are cutting
ExxonMobil (NYSE:XOM), the largest publicly listed oil company in the world, came out at the beginning of March and revealed that it was going to slash capital spending to $37 billion for 2015-2017, down from $42.5 billion last year.

However, Exxon's production is flagging, and the company is only expecting to produce 4.3 million barrels of oil per day by 2017, only marginally higher than the 4.2 million reported during 2013 but 10% lower than the production target of 4.8 million barrels per day set out by the company a year ago.

Exxon expects to start production at 10 large new projects this year and even more projects are slated to start up through 2017, which in total are expected to add 1 million barrels per day to output but this will only be replacing output from mature fields. If Exxon wants higher output, within its spending budget, it too is likely to be demanding lower costs from its contractors.

These changes are likely to be great news for globally integrated service companies like Aker and Schlumberger (NYSE:SLB).

Indeed, Schlumberger's most recent earnings report shows what kind of trends are currently taking place within the oil services industry and how Schlumberger is likely to drive growth over the next few years.

Schlumberger's CEO Paal Kibsgaard is focusing on driving sales of the company's patents and technology, services that allow oil companies to increase production at a lower cost.

Schlumberger's services include mapping the ground to find oil reserves, and like Aker this is where the company is making an efficiency drive by investing in its portfolio of U.S. patents, which has more than doubled during the past nine years.

Luckily, the technology side of the business, where Schlumberger has been focusing is higher margin than the traditional oil services market, and the company's margins have ticked up as a result, despite sliding revenue and operating profit. In particular, Schlumberger's operating margin stood at 22.4% during the fourth quarter of 2013 but ticked up slightly to 22.7% during the first quarter of this year, despite a 5.4% decline in revenue.

Foolish summary
So overall as oil majors cut their capital spending budgets, high tech oil service companies are set to benefit. Schlumberger is in the perfect position to ride this trend as the company is focused on growing its portfolio of technology patents for use within the drilling and exploration sectors.

Schlumberger is turning into the tech darling of the oil services world, and these developments will drive both profits and margins higher.

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Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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