The oil giant, Schlumberger (NYSE:SLB) is facing a decline of 17% in its stock because of the fall in crude oil prices. However, it is quite obvious how the company is suffering from an overflow of capital expenditure. This gives a signal that soon the price per share will fall from $128 to $105 approximately, even though it is widely believed that the stock is not worth as much as it is sold in the market. The oil industry may soon experience a decline, but it seems as if the odds are in the favor of Schlumberger (NYSE:SLB) as it does not face instability of the US stock markets, while having an upper hand in its technological and terrestrial cover. Let’s now try to understand the long term investment strategy for Schlumberger (NYSE:SLB).
While taking a view of the cash flows, it can be seen that the capital expenditure for oil and gas companies led to a great fall by over 35% in the prices of crude oil. The decrease in the price of crude oil has reduced the cash flow by more than $50 billion for the firms in oil industry. Other major oilfield services companies, such as ConocoPhillips and Malaysia’s Petronas have updated that the upcoming 2015 budget will have a setback in their production because of this.
Without the low marginal production cost and long investment planning cycles, the oil firms are probably about to take the largest cut. Schlumberger (NYSE:SLB) makes only 1/3rd of its revenue from North America and the use of pressure pumping is just 15% rather than 30% of Halliburton. This makes Schlumberger (NYSE:SLB) less likely to get bothered by the high cost and falling prices. Also, the company invests and makes further profits from ultra-deep water exploration and they are usually replaced by the larger scale, more capital rich oil companies. So the chances of a similar decline in the contracts from these operations are very low. Nevertheless, the costumers may have more power in bargaining the prices as the number of competition is too much.
It would not be wrong to say that oilfield sector will continue to stay strong for a long period of time. The oil prices are highly unstable for the time being giving irregular cash flows for the firms operating in the oil industry. However, these prices will soon get a grip as soon as the supply is adjusted and the demand escalates. The companies are possibly going to delay their investment tactics instead of calling them off. In addition to this, we cannot ignore the fact that the production of hydrocarbon is becoming costlier as the simpler traditional shallow reserves of water and land are not available as much as they used to. The discovery of oil and its production is turning more complicated, while the exploration and production firms are taking over the process whilst being supported from the oilfield service companies. This can lead to better shareholder returns and upgrading the price of oil.