Which Oil Services Stocks Have Exposure to Iraq?

Sectarian violence in Iraq, OPEC's second-biggest oil producer, has rattled global markets, sending the price of Brent to a nine-month high above $115 last week.

Beyond the obvious impact on oil prices, unrest in Iraq also has major implications for the Western oil and gas companies operating there -- a group that includes large integrated majors, independent producers, and oilfield services companies like Schlumberger (NYSE: SLB  ) , Weatherford (NYSE: WFT  ) , Baker Hughes (NYSE: BHI  ) , and Halliburton (NYSE: HAL  ) , which will be the focus of this writing.

Let's take a closer look at each of these companies' exposure to Iraq and how big of a threat it poses.

Schlumberger and Weatherford
First, some quick background. All four companies are oilfield services providers, which means that they supply equipment and services such as oilfield technology, project management tools, and information solutions to oil and gas producers worldwide. They operate in various regions around the world, though the Middle East/Asia Pacific region has been a key growth driver for all four in recent years.

Schlumberger, for instance, credited strong results from its activities in Saudi Arabia, Iraq, and the United Arab Emirates as a key driver of 2013 revenue, which rose 8% year-over-year to $45.27 billion. But the firm also indicated that it doesn't expect southern Iraq to contribute to growth in coming quarters.

It said first-quarter 2014 activity in southern Iraq decreased significantly compared to the same quarter in 2013 due to the delay of contract awards as a result of ongoing discussions between the international oil companies (IOCs) and the governments. Activity in the Kurdistan region, however, was robust during the first quarter and Schlumberger expects the region to deliver strong revenue growth this year.

Peer Weatherford also cited higher demand for its drilling, well construction, and artificial lift service lines in Iraq, Saudi Arabia, and United Arab Emirates as the main driver for higher Middle East and North Africa (MENA)/Asia Pacific revenues last year, which jumped 20% year-over-year to $3.3 billion. But the company also reported major losses related to its Iraqi projects.

As of year-end 2013, it estimated total project losses on its long-term early production facility construction contracts in Iraq to be $307 million. Not surprisingly, Weatherford plans to exit all loss-making ventures in Iraq and North Africa by the end of the second quarter this year -- a move that should drive significant margin expansion.

Baker Hughes and Halliburton
Baker Hughes also saw strong revenue growth in Iraq last year due mainly to growth in its integrated service contracts. Combined with strong revenue growth in Saudi Arabia, the Arabian Gulf, Southeast Asia, and China, the company's 2013 Middle East and Asia Pacific, or MEAP, revenue jumped 24% year over year.

While the company did incur $79 million of costs due to a significant disruption of its Iraqi operations in the fourth quarter of 2013, operations have since resumed and Iraq contributed strongly to Baker Hughes' first-quarter 2014 revenue growth. The company expects Iraqi margins to improve going forward, contributing to margin expansion for its MEAP business.

Lastly, Halliburton also has a presence in Iraq, where it provides mainly completion and production and drilling and evaluation services. Last year, the company's Middle East/Asia completion and production operating income jumped 18% due in part to higher activity levels in Iraq and Saudi Arabia, while its drilling and evaluation operating income surged 33% due largely to higher activity in Iraq, Indonesia, and Malaysia.

Which has the greatest exposure?
Of all these companies, Schlumberger appears to have the greatest exposure to Iraq, as it relies on its Middle East and Asia division for about a quarter of its revenues. By contrast, Halliburton relies on the Middle East/Asia for just 12% of its revenues, Weatherford for about 22% of its revenues, and Baker Hughes' Middle East/Asia Pacific division contributes 18% of the firm's revenues.  

But Weatherford's plans to exit all loss-making operations in Iraq by year-end significantly reduce its exposure to growing geopolitical risk in the country. While none of these companies have evacuated any staff from Iraq so far, a further deterioration in the nation's security situation poses a meaningful risk to their operations and could have a material impact on their revenues and operating income.

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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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