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Oilfield service companies have faced challenges in their core OFS business due to declining markets in the U.S. and around the world. Low prices for much of the last decade and increases in efficiency have caused rig counts to plummet, and have led some companies to look in new directions for revenue and profit. Companies like Schlumberger, (NYSE:SLB), and Halliburton are refocusing away from equipment rentals and manpower in their traditional core oil related services, to AI led digital subscription revenue sources. These companies are also leveraging their expertise in conducting remote field operations into Data Center power supply and construction. A report put out by Fortune Business Insights, commented on the growth prospects for this industry- “The rapid shift toward digital transformation across industries is driving the demand for data centers. Organizations are increasingly adopting cloud services for flexibility, scalability, and cost efficiency. The growth of cloud computing, including private, public, and hybrid clouds, is significantly boosting data center investments.” For example, SLB has chosen to leverage its extensive experience with hyperscalers in supporting their cloud based software into building out data centers. In their quarterly conference call with analysts, management disclosed that revenue from their Data Center Solutions segment had accelerated rapidly and totaled $331 mm for the quarter. SLB CEO, Olivier Le Peuch commented in this regard during the call- “This is clearly not driven by oil and gas customers. It's driven by our hyperscalers partners that reach out to us to help them respond to this AI boom and data center growth.” Further this represented an increase of 140% from the same period a year ago. If you are an OFS exec and you have a segment that grows at that rate, you naturally commit resources for further growth. And, placed against the backdrop of the TAM-total addressable market in this space shown in the graphic above through 2032, there is ample room for continued growth. The graphic below from SLB’s Data Center Infrastructure page shows where they see their competitive advantage in this area. Still focusing on how SLB has embraced the digital transformation, the company noted their recent reorganization had made their Digital Solutions divisions a distinct reporting entity on their balance sheet. SLB Digital Solutions is comprised of Platform & Applications, Digital Operations, Digital Exploration and Professional Services. The company noted in the call that Digital was now generating revenue at a run rate of $2.4 bn annually with a present margin of 32.7% and a line of sight to 35%. It’s SLB’s plan to integrate digital and subscription services across their entire suite of service offerings. CEO Le Peuch discussed in some detail how eventually revenue from Digital will eclipse revenue from their core oilfield services- “Digital will outperform the Core because the principle we are setting here is essentially for every service we provide, for every well site we touch, for every equipment we deliver, we'll progressively add building on our platform and connecting to our Live Performance Center, will add a set of Digital services and enhance this offering that enhance the operation, the performance and get differentiation and get the customer to create more value.” Halliburton has taken another approach to access the Data Center market. Leveraging its position as the largest fracker in North America it has formed a joint venture-JV with VoltaGrid, a supplier of gas powered “microgrids.” Jeff Miller, CEO of Halliburton noted the synergies of the two companies in the press release- “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. Together, the companies plan to offer turnkey distributed power generation solutions tailored to the needs of regional data centers based on a proven platform.” Microgrids are becoming increasingly in demand as the infrastructure to support the metastatic growth of data centers, just doesn’t exist. If you go to your friendly neighborhood grid-based power purveyor and ask for a hookup, you will be told to come back in about 5-6 years. Or longer. That obviously isn’t working for the hyperscalers like Microsoft, (NYSE:MSFT), or Amazon, (NYSE:AMZN) expanding their data center footprints to meet their internal demands to provide cloud support AI storage. In that light the future looks pretty bright for companies that propose to fill the gap between total power demand and what the installed grid can provide. If you aren’t familiar with the changes happening in the fracking industry, let me spend a few words explaining them. Up until a few years ago the Tier II diesel engine was the power source for most frac pumps. Two things drove an industry rebooting to Tier IV DBG-Dynamic Gas Blending. Diesel is expensive and produces a lot of noxious emissions. The Tier IV DGB engines provided ability to mix field gas with diesel to cut emissions and save money. When you realize a single fleet of frac pumps can use-7-10 mm gallons of diesel annually, you can see there was a big carrot to shift to the DGB engines. Now most of the Tier II fleets have been retired and the Tier IV DGB is now the standard. But the final step in the evolution of frac pumps is still underway. If you take the thinking that emissions reduction, cost savings and more power-electric motors can deliver nearly twice the horsepower of Tier II engines, a step further, you can see all-electric equipment would be even more efficient. That’s the direction the industry is now going. Halliburton now has over half its inventory of frac fleets as all electric- “Zeus-fleets,” and has a recurring need for microgrid support. A Halliburton Zeus fleet on location with VoltaGrid Power The JV is fairly new between Halliburton and VoltaGrid, but with Halliburton’s 20% stake, revenue and profits should begin to hit the bottom line in coming quarters. Halliburton will also be VoltaGrid’s partner on international projects. Jeff Miller commented on their expectations for the partnership in the call- “We have signed an agreement with VoltaGrid to be their international partner for delivering distributed power solutions for data centers outside of North America. Through this agreement, we will combine Halliburton's global reach, design, manufacturing and operating capabilities with VoltaGrid's distributed power expertise to deliver reliable power at scale. I expect this will be an important long-term growth opportunity for both VoltaGrid and Halliburton.” Your takeaway The major oilfield service companies have had to adapt to a changed macro environment for their services. The old paradigm of relying on rental revenue, equipment sales, and technical support is giving way to seeking new customers outside the oil and gas industry for their remote operations expertise. Additionally, their core focus on oilfield customers is on incorporating digital AI infrastructure across their platforms. Much of this is marketed through a subscription model that incentivizes clients to build long-term working relationships. Early indications are that these moves into digital infrastructure and subscription revenue should enhance profitability. SLB noted during its recent conference call that its Digital Solutions segment was generating an EBITDA margin of 32%, with expected growth to 35% in the fourth quarter of this year. For the entire company, SLB reported an EBITDA margin of 23.1%. Both companies trade at single-digit EV/EBITDA multiples, about half what they did five years ago. This suggests that investors have not yet recognized these companies' revenue and profit potential from their new ventures, making current stock prices an attractive entry point. 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