Feb 22 Computer Modelling Group Ltd, a small oilfield modeling software company that hitched its wagon to the Canadian shale oil bonanza, is grabbing market share from bigger rivals as it takes them on in the United States.
Calgary-based CMG, which supplies reservoir-simulation software to 525 firms in 55 countries, is betting that its specialization in unconventional reservoirs will help it win over some clients from industry behemoths such as Schlumberger Ltd, the top oilfield services provider.
With the advent of new drilling methods such as hydraulic fracturing, U.S. companies are buying land in shale fields instead of hunting for oil and gas in riskier offshore regions.
Both CMG and Schlumberger build models that predict oil and gas flow and CMG, with around 170 employees, is estimated to command about a quarter of the market, which T. Rowe Price investment analyst Shinwoo Kim said is about $200 million. The fund holds a 0.75 percent stake in CMG.
Schlumberger's market share is estimated at up to 60 percent, and CMG Chief Executive Kenneth Dedeluk told Reuters in an interview he is looking to swing some of that his way.
"We've converted some of Schlumberger's customers to our products over the last 3 to 4 years..." Dedeluk said. "We're making more inroads with their customers than they are with ours, I can assure you that."
He said Schlumberger remains CMG's main competitor as competing products from Halliburton Co, the other major oilfield services company, "have fallen out of favor with at least our customers around the world".
Schlumberger's dominance is in large conventional black-oil offshore fields, whereas CMG is focused on shale fields - where oil and gas is trapped in smaller pockets that require a different form of modeling.
"We're dominant in a growing space where as they (Schlumberger) are dominant in a diminishing space," said Dedeluk, who has held the top job at CMG for more than a decade.
CMG has a near monopoly in unconventional reservoir modeling in Canada, and the company is now looking to boost its presence in the United States, the Middle East and Asia.
Schlumberger declined to comment on its rival but analyst Shinwoo Kim pointed out that the bigger firm was focused on bigger markets.
Schlumberger is chasing a $5 billion oilfield services market and CMG was competing in a much smaller part of that, he said.
CMG's shares have risen 35 percent over the past year, closing at C$21.85 on the Toronto Stock Exchange on Thursday. Schlumberger's shares have fallen marginally during the period.
"I would buy CMG's stock (on expectations) that it would continue to grow its market share," said Charles Jenkins, senior vice president of Standard Life Investments Inc, which has a 0.96 percent stake in CMG.
The intrinsic value of the CMG stock is C$16.40, according to Thomson Reuters StarMine. The model is a measure of how much a stock should be worth currently when considering expected growth rates over the next 15 years.
"It's not a cheap company if you look at the multiples it is trading at," acknowledges Andrey Omelchak, a portfolio manager at Montrusco Bolton Investments Inc, which holds a 1.73 percent stake in CMG.
However, he still saw it as attractive and picked it to reach as high as $24 by the end of the year.
CMG CEO Dedeluk said the majority of the company's new employees are fresh out of university. The company installs its software at colleges to make students familiar with it, which helps in retaining new joiners.
Unable to match the marketing spend of its rivals, it deploys engineers to sell directly to reservoir engineers at oil and gas companies.
"We can't compete against a Schlumberger when it comes to advertising or events or shows," Dedeluk said, acknowledging that the competition is fierce.
"We've seen my competitors discount their product by as much as 90 percent trying to gain entry into a market where we are dominant," he said.
Schlumberger has an advantage too in that it is a one-stop-shop, helping oil and gas companies do everything from finding hydrocarbon deposits to drilling and positioning wells to supporting production.
CMG also faces increasing competition from in-house simulation software being developed by big oil and gas companies such as Royal Dutch Shell Plc, Exxon Mobil Corp and ConocoPhillips. (Additional reporting by Braden Reddall in San Francisco; Editing by Rodney Joyce and Sriraj Kalluvila)