Schlumberger Goes Geothermal

Oil field services giant Schlumberger Ltd. (SLB:  NYSE) has entered into an agreement with long-time collaborator Thermal Energy Partners to form a new geothermal energy development enterprise.  A mash-up of acronyms for the two partners yields a name for the joint effort:  STEP Energy.  The due plans to step lively right out of the starting gate with a goal of 100 megawatts of geothermal energy production capacity.

Schlumberger is so closely linked to the oil and gas sector, its annual report does not even mention geothermal energy.  It may come as a surprise to some that Schlumberger already has a presence in the geothermal sector.  In 2010, the company acquired GeothermEx, Inc., a California-based provider of geothermal consulting services.  GeothermEx had built a strong reputation through its project development and reservoir management successes.  With customers in over 50 countries GeothermEx helped give Schlumberger’s Geothermal Services division new visibility in the sector even if shareholders were left in the dark.

In February 2020, Schlumberger created a new division, cleverly calling it Schlumberger New Energy  -  as if somehow the company was creating something entirely unprecedented.  The company’s technology guru Ashok Belani was moved to the new division.  Initially, New Energy was commissioned to deploy technology for reducing the carbon footprint in oil and gas exploration and production operations and to seek out ‘carbon-neutral’ technologies.  Apparently, it would be risky applying carbon control methods directly to the company’s central business line of exploration and production, lest it taint Schlumberger’s reputation among oil and gas industry czars.  It is into this division that Schlumberger folded GeothermEx.  New Energy will also manage the joint venture with Thermal Energy Partners.

There are no identity issues at Thermal Energy Partners.  The company describes itself without reservation in terms of renewable energy, zero carbon and sustainability.  TEP was founded in 2010, giving the company a decade of experience in geothermal project design, project development and finance as well as energy production and geothermal plant operations.  It appears TEP’s experience is a good match for Schlumberger’s extensive drilling experience, especially drilling in the high pressure, high temperature situations typical of geothermal projects.

Investors will have a chance to see how the team works together in STEP’s first project at the Caribbean island of Nevis.  Schlumberger’s Integrated Drilling Services unit was already selected to install the geothermal production and injection wells for the project.  The ten megawatt Nevis Geothermal Power Project is expected to supply all the electricity for the island, which is one of several islands in the West Indies chain and is part of the Federation of Saint Kitts and Nevis.  The geothermal plant will allow Nevis to eliminate fossil fuel imports for power generation and become exclusively reliant on zero-emission renewable power.

A position in Schlumberger’s new geothermal initiative will require a heavy dose of oil and gas.  The company reports revenue along functional lines rather than by division.  Thus it is not possible to discern just how much of its business is related to geothermal energy and how much is related to conventional oil and gas services.  The company captured $29.6 billion in total revenue in the twelve months ending June 2020, turning $5.6 billion into operating cash flow even as reported net income was negative.  The company reported a slew of impairments in recent periods as weak oil and gas prices have cut into asset values.  The company also incurred severance costs workforce was reduced to better align operations with lower oil and gas demand.

Some investors may be tempted to give Schlumberger the benefit of the doubt that its geothermal initiative can turn this oil and gas sector darling into a renewable energy princess.   The stock price is trading well off historic highs and may seem like a bargain.  Unfortunately, the weak share price developed following report of dismal June 2020 quarter operating results and the announcement of a 75% cut in the company’s dividend.  The shares are now trading near 48 time projected earnings.  Investors might be better value in a trip to Nevis.      

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.