Boom Times Are Ahead for the Oil Services Industry

Baker Hughes and Schlumberger are set to benefit as the shale oil boom spreads around the rest of the world.

Rupert Hargreaves
Rupert Hargreaves
Jul 21, 2014 at 10:26AM
Energy, Materials, and Utilities

Baker Hughes (NYSE:BHI) reported a stellar set of second quarter results last week, beating analysts' estimates. What's more, the company pleased the market by issuing an upbeat forecast for the rest of the year.

Baker, the third largest oil services company on the market, reported second quarter earnings per share of $0.92, up 51% year on year and beating analyst consensus of $0.90. Additionally, the company reported revenues of $5.94 billion, beating consensus of $5.87 billion.

The company also reported wider profit margins, with its operating margin during the quarter widening from the 7.9% reported during the second quarter of last year to 10.6% for this year's quarter.

Higher guidance
Despite these impressive results, what really fired up analysts was management's impressive guidance for the rest of the year. Baker's management reported that around the world, the fundamentals of the oil services business continued to strengthen. Essentially, this means that demand for Baker Hughes' services is rising.

In particular, management expects a higher rig count around the world throughout the second half of the year. 

Hopefully, a more active drilling environment within North America will add a boost to Baker Hughes' North American sales. The company's North American arm has been growing at a slower rate than the rest of the company. North American revenue rose 6% during the second quarter to $2.84 billion, lagging the Middle East and Asia Pacific where revenues climbed 18% to $1.15 billion. Baker Hughes still generates almost 48% of its revenue in North America.

In addition to Baker Hughes' upbeat guidance, what really caught Wall Street's eye was the fact that the company's management has started to notice that the shale oil boom is spreading outside of the U.S. This is not just good news for Baker Hughes but also its larger peer, Schlumberger (NYSE:SLB).

Spreading around the world
Unconventional shale drilling so far has largely been a North American phenomenon. According to Baker Hughes' CEO Martin Craighead, "Products and services we recently introduced to improve the economics of North America shale production, are now finding new homes in the Middle East, Argentina, North Africa, Russia, and China."

For Schlumberger, an expansion of the shale oil boom outside of the U.S. is great news. Indeed, Schlumberger has the lowest exposure to North America out of the big three oil services providers (Schlumberger, Halliburton, and Baker Hughes).

The international oil services market brought in about 70% of Schlumberger's revenue during the second quarter, while Baker Hughes only generated 50% of its revenue within international markets. For Schlumberger, an increasing international demand for shale technology, which has been perfected by the company within the U.S., is likely to accelerate sales growth.

Unfortunately, due to its size, Schlumberger is not going to be able to grow anywhere near as fast as Baker Hughes. The company reported quarterly revenue of $12.05 billion for the recently ended quarter, more than double that of its smaller peer. Sales actually fell within Latin America, although they bounced up by 12% and 4% in the Middle East and Asia respectively.

Well positioned
Schlumberger is undoubtedly the world leader in oil services. The company offers everything from digital mapping and analysis to ultra-deepwater drilling. The company's own management has gone so far as to call its technology "best in class."

Management is so confident in Schlumberger's success that they are forecasting earnings per share of $9 to $10 by 2017, a compounded annual growth rate of 17% to 20% from current levels. Investors can accept this forecast with a degree of certainty, too, as the company has a record of hitting targets and achieving its goals.

The bottom line
It would appear as if things are looking up for the oil services industry. As the shale oil boom spreads around the world, services from providers such as Baker Hughes and Schlumberger will be in increasing demand. Schlumberger is so confident that it expects earnings to expand at an annual clip of 17% to 20% over the next few years, and there are few reasons to doubt this lofty forecast.