With oil prices firmly above $80 a barrel, it's no surprise oil and gas companies are increasing their capital spending budgets after making serious cuts in late 2008. The oilfield services industry, which provides the equipment and technology, is a clear beneficiary of a ramp in spending from major oil and gas companies.
The largest of the services firms Schlumberger
The international markets is key for Schlumberger as evidenced from the last cycle when revenues nearly tripled, operating income grew just shy of 500%, and the stock quadrupled in value. Schlumberger has the ability to significantly expand operating margins if spending heats up internationally as it earns much higher margins from international markets. With international rig counts recently surpassing peak levels last reached in 2008, spending appears ready to ramp up outside North America.
Regions worth watching
International shale exploration and unconventional gas development should be a key theme going forward in regions such as North Africa, the Middle East, India, and China. Schlumberger CEO Andrew Gould recently characterized Schlumberger's participation as "very high" in these regions. The idea is for these countries to use more natural gas to meet local energy demand which will free up more oil for export.
The Kuwait Petroleum Corp. recently announced an ambitious $90 billion capital spending program over the next five years, and the Abu Dhabi National Oil Co. plans on spending $60 billion in the coming decade. During Schlumberger's most recent conference call management noted that there is "considerable urgency" in the Middle East to deal with the region's gas shortage. Schlumberger has an advantage over its smaller competitors in its relationships with international oil companies, the dominant players in the Middle East.
Iraq is another key country in the Middle East where the government has plans to quadruple oil production by 2016. Oil giants such as BP
The Foolish bottom line
The Middle East is only one of the international regions where Schlumberger will benefit from increased exploration and production activity. That said, it is a key region because of its ability to absorb excess capacity and strengthen pricing, which I expect will be a catalyst for the stock. Next week, we'll take a look at another tailwind in Schlumberger's favor: the exploration phase. In the meantime, feel free to drop by my discussion board for further analysis.
Bryan White is an analyst for the Motley Fool and doesn't own shares of any of the companies in this article. Total is a Motley Fool Income Investor selection. The Fool owns shares of Schlumberger. 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.