In the energy services industry, technological change can be volatile for earnings and free cash flow. Schlumberger (SLB), one of the industry’s largest players, is depending on their enhanced technology, known as HiWay, in order to improve the “fracking” process. Hydraulic fracturing, otherwise known as fracking, is the process of pumping a mixture of water, sediments, and other materials into a well at a high pressure to release trapped gases, petroleum, or other liquids. HiWay reduces the quantity of proppant and water required for fracking by up to 40% and 60%, respectively. Proppant is a material used in hydraulic fracturing for holding open the cracks made in the drilling formation by the extremely high pressure applied in the treatment. It refers to the sand grains, beads, or other miniature pellets suspended in the fracturing fluid that are forced into the formation and remain to prop open cracks and crevices permitting oil to flow more freely.
Thus, HiWay cuts operating expenses meaningfully for service companies like Schlumberger. Schlumberger’s drilling group pretax operating income grew 12% from last quarter to $738 million, primarily driven by both stronger activity and an improved technology revenue mix. According to Kyel Hodenfield, the company’s vice president for unconventional resources, Schlumberger is already using the system on nearly a third of all fracking jobs, and expects that to rise rapidly to 50-70%.
Hydraulic fracturing capacity in North America grew 42% in 2011 and is expected to increase with the larger emphasis on unconventional shale plays. According to analysts Spears & Associates, the total onshore oil and gas industry drilling and completions has increased sharply to $150 billion per year from only $20 billion per year in 2002. Cutting operating costs makes Schlumberger more competitive against other large competitors such as Halliburton Company (HAL), Diamond Offshore Drilling (DO), Baker Hughes (BHI), and Noble Corporation (NE). Also, this development may be beneficial to investors of the SPDR S&P Oil & Gas Equipment & Services ETF (XES), which holds some of these companies within its portfolio.