Essay: Challenges & Strategic Choices In Oil Field Service Industry - Schlumberger Limited (2014-2017)

After two years of hunkering down, struggling U.S. oilfield service providers are preparing for an expected oil-price recovery in an unexpected way: filing for bankruptcy.

Companies that drill wells, haul water and provide other services to energy exploration firms have been waiting out a slump in oil prices by idling machinery, laying off workers and extending deadlines for repaying debts. Now they are turning to Chapter 11 creditor protection to shed debt and raise cash so they can spend and invest again.

Without bankruptcy, many of small and medium-sized service companies risk missing out on any upturn that could follow President-elect Donald Trump's prodrilling agenda or OPEC's plan to cut oil production for the first time in eight
years, restructuring advisors said.” (Eyeing upswing, more U.S. oilfield service firms restructure, Reuters, Dec 2016)

“As oilfield services companies grow into this space, they handle more risk. The current low oil price environment may accelerate that trend, leading them and oil company operators into new partnerships through which risk can be shared
and project delivery optimized”. (KPMG, Unsung workhorses of the oil industry – Oilfield Services Companies, March 2016)

The oil and gas sector is a diverse one made up of various types of firms including IOCs (International Oil Companies), NOCs (National Oil Companies), Independents, Junior oil firms and Oilfield Service Providers. Oilfield Service Providers have been called the workhorse of the oil and gas sector. During the 2014-2016 oil price drop Oilfield Service Providers also suffered under falling profits due to the issues facing their customers, price cuts and the wider turbulent business environment. Like many firms in the sector Oilfield service providers had to rethink and be flexible in their approach to
strategy and the choices they made during this time always with an eye for the future. 

Write a report critically analysing one Oilfield Service Provider operating during 2014-2017 in the oil and gas sector. Your report should analyse the strategic choices made by the Oilfield Service Provider. Your report should analyse the following –

• Provide a justification as to why you chose that particular Oilfield Service Provider
• Analyse the challenges and benefits facing your chosen Oilfield Service Provider during 2014-2017
• Your report should include appropriate oil and gas examples about your chosen Oilfield Service Provider
• Provide recommendations for your chosen Oilfield Service Provider to improve  their strategic direction.

Background of Schlumberger Limited

Oil field service industry involves greater complexity than any other industry. The oil field services experience tough years during low prices and weak demand. The providers must work strategically and plan for the future being mindful of the risk. The US oilfield service providers are preparing for an expected oil-price recovery after struggling for two years. Some are filing for bankruptcy. Without bankruptcy, the small and middle-sized companies may risk missing out upturn that could follow the OPEC's plan to cut oil production. The leading oil field service providing companies face great risk during low oil price environment. During the 2014-2016 oil price drop, Oilfield Service Providers also suffered under falling profits. It was due to the issues facing their price cuts, customers, and the wider turbulent business environment. Thus, there is a need for strategic choices to share the risk and optimise the project delivery. The report aims to critically analyse the oil field service provider operating during 2014-2017. For this purpose, the assignment focuses on Schlumberger limited. The rationale for selecting this provider as this company is worthy of top spot in the list of the oil field services companies. Schlumberger has the exhaustive portfolio of the oilfield products by virtue of which it ranks 287 in the Fortune Global 500 Company. In the Middle East, it is leading oil field service provider (www.bloomberg.com. 2017).  The report analyses the challenges and benefits during 2014-2017 with appropriate examples. Based on the analysis, the report provides recommendations for the chosen Oilfield Service Provider to improve their strategic direction.

Schlumberger Limited is no exception to the parameters of oilfield service companies that is the provision of the equipment, infrastructure, services and intellectual property. These parameters are needed by an international industry of this sector to transport the extracted crude oil from earth to the consumer via refinery. Schlumberger limited supplies information solution technology and integrated project management and optimises the reservoir performance for working people in the oil and gas industry. Schlumberger supplies the petroleum industry with processing, seismic acquisition, well testing, formation evaluation, directional drilling, artificial lift, well cementing, stimulation, flow assurance and well completion. Schlumberger limited offers integrate field management solutions. It oversees and operates the assets on behalf of the company.  The company is operating in more than one 85 countries with one of its principal executive office headquartered in the US (Texas) (www.slb.com 2017). Schlumberger limited supplies technology product to the oil and gas exploration. The reservoir characterisation group segment, provides the reservoir development services, imaging and monitoring services, wireless technologies, slickline services; and petrochemical data servicing. The drilling group segment of the company markets fixed cutter drill bits provides pressure drilling. Its Production Group segment offers well services, and lastly, the Cameron Group segment offers drilling equipment and integrated subsea production systems (www.bloomberg.com. 2017).

Challenges faced by Schlumberger Limited during 2014-2017

The company since last two years has been suffering from the weak financial position. The company is also exposed to several risks as it gets significant revenue from the Non-US states. Further challenges come from the high dependency of revenue on the client's expenditure level.   The threats for which the company needs strategic planning are the dynamic prices of the crude oil and gas. Rise in the substitute fuels and sustaining the high environmental compliance cost demands the strategic choices (www.bloomberg.com. 2017). The company has faced many other challenges in regards to the strict demands for the technology solution. It was challenging to maintain the high quality of the technical translation. There is a strict observation of terminology. The main challenge was the professional market adaptation of the materials translated. Meeting the tight deadlines even for the high volume projects was difficult. Schlumberger limited always recruited people in the industry with the field of expertise.  The company always valued the client’s wishes by closely interacting with the client (Dugan and Rothfeld 2012).

As per Mittal and Groening (2016) the company has many benefits due to its globally competitive advantage. Along with the high skill level of the workers in the information technology, there is a strong operational basis that is low-cost based. The company is in strong financial position.  Even during the mid-2014 with the down cycle, the company had not failed to meet its energy service demand. Until 2016 there was no difference in the decisions, and yet it failed to push high the stock market. In the quarter of June 2016, the 8% increase was marked as second best growth rate despite the decrease of the crude price by 15% at the beginning of 2017. Instead, there was an increase in the company revenue and all its groups. There is a possibility that the capital may expand and it will give a platform to leverage potential investors. Due to its global developmental centres, the company will be able to support its multinational clients (Dugan and Rothfeld 2012).  

Other than the strong quarter of Schlumberger in US land there were some additional benefits. Schlumberger’s 2H17 outlook for the business specifically for its international side was a robust strategy.  The activity outlook in the North America in 2017 shows positive signs in the international market. There is an increase in the activity. It appears from the news buzz that there are new project plans coming in the GeoMarkets (Mba et al. 2016). It can be interpreted that company is showing the gradual improvement in fundamentals considering the state of the oil and gas with the weak crude oil prices.  Further, there is the substantial improvement in the E&P activity in the US and different geographies. It is highly likely that the company will fire on all the cylinders (Mittal and Groening 2016).

Benefits of Schlumberger Limited

With the struggling oil price recovery, the investor’s patience is diminishing. In 2016 there is a drop in the SLB's valuations as well as the future EPS expectations. In spite of this, there was solid performance delivered by Schlumberger. There was a dip in the stock price (-22% nearly) in 2017 and aims to reach fresh five years lows according to (Mittal and Groening 2016). Kleinberg et al. (2016) argued that if the company maintained the same annualised EPS of $4.00-$5.00, it could remain consistent with the stock history.  It is because this EPS was found between 2008-2009, a time when recession was profound. The company maintained this EPA during the crude oil bear of 2014-2016. Talking about the commodity price-sensitive stock, people need to be more cautious while investing as the company does not come without the systemic risks.

The main strategic choice of the company is the new merger and acquisition. The company employs client-oriented approach an effectively reacts to the crisis (Wild et al. 2016). According to Clark (2016), the company struggles to achieve perfection in all its areas of activity. The company has won the client's trust for its efficacy in maintaining the confidentiality of the client's information. The company can develop relationships with the other company with its technology innovation and infrastructure, extensive service offering and market share leadership. According to Zargaran et al. (2013), the theory of making acquisition amidst the down cycle is the best strategy as the valuation is cheaper. It can be explained by the example of the integration of Cameron International. Even though the revenue was declining, and the management team were trying to right-size the business, the integration of Cameron International was justified for the investors (Das 2015).  As per the literature review, the business was growing smoothly with the integration and was also mentioned by the president of the Cameron Group. With the help of this integration, the company was able to achieve the first year target of $300 million of synergies. The company achieved the target in the first 10 months of the acquisition. In the second year, the company is preparing for the $600 million target (Mba et al. 2016).

The transaction strategy of the company was accretive between 2014-2016. In the quarter of 2017, the business booked $180 million of synergy-related business. The majority of it came from the Middle East. The company will continue with its integration team, and the new strategy is to focus on the growth synergies than the cost synergies.  It can be expected that certain market pockets will perform better than other especially as the investors are focusing on recovery in oil and gas drilling activity (Crowe 2017). The other strategic choice of the company is the narrowing of the service offering or the recovery in service pricing. With the drop in the rig count, there was the sequential drop in the revenue. The North American offshore market is becoming tough.  It is the other major challenge of Schlumberger as the pricing remained under pressure despite the market having technical, operational challenge. To ensure adequate returns the company is using effective strategy as there is the chance that the business environment may become unsustainable.  It is the strategy of redeployment of resources to the market that can fetch sufficient return (Gong 2018).

Strategic Choices for Schlumberger Limited

The other major challenge of Schlumberger is the OPEC plan. There is a profound impact on the production of all the capital spending cuts. This plan with the high market share is looking to grab all the market share. With the drop in the in North American production, on the supply side, the non-OPEC production remains under pressure. To offset the falling non-OPEC production, the OPEC supply production increased and tried to meet the demands. It led to decrease in the spare capacity (2 million per day). With the help of the OPEC agreement, there can be reduction in the production that is 1.8 million barrels per day. It may speed up the tightening of the oil market. Thus taking hold of the production hold is the effective strategy (Crowe 2017).

The other strategic decision of Schlumberger is to increase the global investment. It is effective as it will help hold the production for medium to long-term. With the help of the investments, it will be possible for the company to address the future challenges. With the improvement in the E&P cash flow internationally, there is a chance that the E&P investments will increase in 2018. There is a need of spending high on the offshore projects worth billion. It will help in carving out comfortable portion of the market as argued by (www.cnbc.com 2017). The other strategy that is effective for Schlumberger is the low-cost production. For a barrel of oil, there is a low breakeven price set which may be the part of the more efficient drilling practices. The strategy of the company is to work at steep discounts. Further, it is also involved in the financing of the drill work to make more money. It is planning to increase the price of the contracts as the efforts have helped in bridging the trough of cycle for their customers. The strategy of watching for per barrel cost is effective for investing in the exploration and production companies (Chamberlin 2017).  As per Maestro et al. (2017) this strategy may be a bit of smoke and mirrors.

In response to the extended oil price downturn, it can be recommended for Schlumberger to employ the corporate strategic objectives. There is a need of focusing on sustainable profitability. It is useless to increase the cost of debt in the expectation that the interest rates will rise in future. Therefore, under different price scenarios, there is the need for strategic plan for profitability (Maestro et al. 2017). For future success, the key factor to be focused is differentiated capabilities. It is needed because of the variety of operating environments in the oil and gas sector. The US has unconventional market, so there is a need of tailoring the operating models to meet the demands of the unconventional production (Badiru and Osisanya 2016). Some of the companies in the exploration and production companies focus laserlike on the cost efficiency. This strategy helps them to gain mature assets. It is also evident from the recent acquisition of Baker Hughes for improving operations via automation, enhanced data analysis. Further, there is a need to replace the model of single integrated company.  Such model discovers and develops an oil or gas field and operates till its depletion. One of the good examples of this is the alliance between BP’s with Kosmos. This alliance helped it to seek assets from Mauritius ad leverage technical exploration skills (Maestro et al. 2017).   

Merger and Acquisition

It is suggested by Badiru and Osisanya (2016) that there is a change of perspective regarding the portfolio evaluation. It should not be treated as cash generating divestment. Instead, it means to restructure the business conditions by forecasting the future. The business activities should match the capabilities of the organisation. It is better to explore new technologies such as robotics, for repetitive tasks such as replacing the broken machinery or connecting pipes, as it will help reduce the labour cost. It is also recommended that the company should focus more on the innovative approaches to retain and recruit talents. It will be required for long-term success as there is an enormous cost of human resource in the oil and gas sector. It will also help in tackling the threat of new entrants (Ghandi and Lin 2014). Schlumberger must employ the strategies of Wal-Mart, which work through third-party manufacturers. The bargaining power of the third party agents is low, and it will increase the profitability.  The exploration and development will fail if there is lack of capacity in this sector. At the time of increasing demand, it will hamper the new sources of supply as well collaboration between the multinational and state owned services sector and the producers. Schlumberger Ltd. is the industry which provides the technical and engineering expertise needed for exploration and production.  However, there is a pressing need of finding new supplies as IEA estimates that by the year 2035 the demand of the barrels may increase. It may reach up to 99 million barrels a day (Ghandi and Lin 2014).   

Conclusion

It is evident from the critical analysis that Schlumberger limited is demonstrating strong performance. It can employ the game-changing trend as early as possible by predicting the uncertainties or risks. More or less the organisation has proved itself that it can reinvent and innovate itself. Inspire of having tough period from 2014-2016, Schlumberger was able to manage in the low oil price environment. It is possible to emerge as the robust sector with the help of flexible and right actions. The exploration and development will fail if there is lack of capacity in this sector. At the time of increasing demand, it will hamper the new sources of supply as well collaboration between the multinational and state owned services sector and the producers. Schlumberger Ltd is the industry which provides the technical and engineering expertise needed for exploration and production.  In conclusion, Schlumberger Ltd to a great extent has been flexible in its approach to strategy. It has always made the choices during the turbulent 2014-2016 always with an eye for the future.

References

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