Oilfield Services Pivot to Data Centers as AI Demand Rises

Oilfield service companies are increasingly shifting their focus from traditional oil and gas operations to the burgeoning data center market, driven by the rapid growth of artificial intelligence (AI) technologies. Companies such as Schlumberger and Halliburton are pivoting towards digital solutions and data center infrastructure in response to declining oil markets and a significant transformation in their revenue streams.

The oil and gas sector has faced numerous challenges, including low prices and heightened operational efficiencies that have led to a decline in rig counts. In this evolving landscape, major players are exploring new avenues for growth. Schlumberger, for example, is leveraging its expertise in remote operations to capitalize on the increasing demand for data centers, which are critical for supporting cloud computing and AI applications.

According to a report by Fortune Business Insights, the shift toward digital transformation is driving significant investments in data centers. Organizations are increasingly adopting cloud services for their flexibility, scalability, and cost efficiency. The growth of cloud computing—encompassing private, public, and hybrid clouds—is significantly boosting data center investments.

During a recent quarterly conference call, Schlumberger’s CEO, Olivier Le Peuch, highlighted the rapid acceleration of their Data Center Solutions segment, which generated $331 million in revenue for the quarter, reflecting a remarkable increase of 140% compared to the previous year. Le Peuch emphasized that this growth is primarily driven by partnerships with hyperscalers, rather than traditional oil and gas customers. He stated, “This is clearly not driven by oil and gas customers. It’s driven by our hyperscaler partners that reach out to us to help them respond to this AI boom and data center growth.”

New Directions for Oilfield Service Companies

As Schlumberger embraces digital transformation, it has reorganized its operations to create a distinct reporting entity for its Digital Solutions division. This division encompasses various sectors, including Platform & Applications, Digital Operations, Digital Exploration, and Professional Services. The company reported an annual revenue run rate of $2.4 billion for its digital services, with a current margin of 32.7% and an anticipated increase to 35%.

Le Peuch’s vision indicates that revenue from digital services is expected to surpass that of core oilfield services in the near future. He elaborated on this strategy, stating, “Digital will outperform the Core because the principle we are setting here is essentially for every service we provide… we’ll progressively add building on our platform and connecting to our Live Performance Center.”

Halliburton is taking a different approach to enter the data center market. As the largest fracker in North America, the company has formed a joint venture with VoltaGrid, a provider of gas-powered microgrids. In a recent press release, Halliburton’s CEO, Jeff Miller, explained the synergies between the two companies: “Through the venture, Halliburton will leverage its global operational footprint, local infrastructure, and regional regulatory expertise, while VoltaGrid will contribute its proprietary engineering design, technology innovation, and procurement capabilities.”

The partnership aims to deliver tailored distributed power generation solutions for regional data centers, addressing the mounting demand for infrastructure to support the rapid growth of data centers. Currently, traditional power grids are struggling to meet this demand, often resulting in long waiting periods for new connections, which can take as long as five to six years.

The Future of Fracking and Power Solutions

The fracking industry has undergone significant changes in recent years, particularly regarding its power sources. Historically, Tier II diesel engines were the standard power source for most fracking equipment. However, the shift to Tier IV Dynamic Gas Blending (DGB) engines has gained momentum, driven by the need to reduce emissions and lower costs. The ability to mix field gas with diesel has made these engines more environmentally friendly and cost-effective.

As the industry continues to innovate, the transition to all-electric equipment is becoming increasingly prevalent. Halliburton has reported that over half of its fracking fleet now consists of all-electric “Zeus-fleets,” which require microgrid support to function effectively. Miller noted the potential for growth in international markets through the partnership with VoltaGrid, stating, “We have signed an agreement with VoltaGrid to be their international partner for delivering distributed power solutions for data centers outside of North America.”

The shift in strategy among major oilfield service companies highlights their adaptability in a changing economic landscape. As traditional revenue streams dwindle, these companies are seeking new customers outside the oil and gas sector while incorporating digital AI infrastructure into their offerings. The subscription model for digital services encourages long-term relationships with clients, potentially enhancing profitability.

Schlumberger’s recent performance reflects this transition, with its Digital Solutions segment generating an EBITDA margin of 32%, expected to grow to 35% in the fourth quarter of 2024. Overall, Schlumberger reported an EBITDA margin of 23.1% for the company as a whole.

Both Schlumberger and Halliburton currently trade at single-digit EV/EBITDA multiples, which is approximately half of what they were five years ago. This suggests that investors have yet to fully recognize the revenue and profit potential arising from these new ventures, making current stock prices appealing for potential investors.

As the oilfield services landscape continues to evolve, the emphasis on digital infrastructure and data centers presents promising opportunities for growth and profitability in the coming years.