SLB Schlumberger Ltd

U.S. oilfield service company, Baker Hughes Inc. (BHI) has entered into a discussion with Iraqi authorities for the development of Kirkuk oil fields in northern Iraq. Schlumberger (SLB) and U.K. super giant BP Plc (BP) have also shown interest for the Kirkuk development project.

In its quest to generate 600,000 barrels a day in due course of time in the Kirkuk oil field, Iraq intends to sign a long-term deal, spanning five to ten years, with one of these three companies.

The Iraqi government signed several developmental contracts, including the Rumaila and Zubair deals, to boost its output level. Located in southern Iraq, approximately 32 kilometers from the Kuwaiti border, the Rumaila oil field is the world’s fourth largest oil field with the current capacity of 1.3 million barrels per day. BP enjoys the operational interest of 38% in Rumaila. Other two companies – Baker Hughes and Schlumberger – are already busy in numerous oil fields in southern Iraq.

Kirkuk was one of the fields auctioned by Baghdad in the first post-war oil licensing round back in 2009. Even though Iraq possesses the world’s fourth-largest proven reserves of about 143.1 billion barrels of conventional crude, approval delays, war and disruption have worn out the sector. Discovered in 1927, production at Kirkuk has dropped to a level of 280,000 barrels a day from a peak of 900,000 barrels a day in early 2000s.

Houston, Texas-based Baker Hughes is one of the largest oilfield service companies in the world, providing a range of services to the global oil and gas industry. We believe the company’s strong portfolio of products and services will help it generate better-than-average results in the domestic market and enable it to further penetrate international markets. Importantly, the company expects activity to climb into 2012, which will consequently support pricing improvements. Notably, Baker Hughes’ international margins rose to 16% in fourth quarter 2011.

However, Baker’s financial and operational performances face a number of headwinds, including changes in exploration and production spending patterns, commodity price fluctuations, geopolitical risks, regional spending trends, competition, the emergence of new technology and changes in economic conditions. Hence, we maintain our Neutral recommendation on the stock.

 
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