SLB Schlumberger Ltd

The world’s largest oilfield services provider Schlumberger Ltd. (SLB) has reported fourth-quarter 2011 earnings of $1.11 per share (excluding special items), edging out the Zacks Consensus Estimate of $1.09. The quarter’s results also showed a steady improvement from the year-earlier profit of 85 cents per share.

Schlumberger posted earnings of $3.66 per share in 2012, which missed Zacks Consensus Estimate by a penny. However, the earnings increased 28% from $2.86 in 2010.

Income from continuing operations, excluding charges, stood at $1.49 billion, up 28% year over year. The year-over-year increase was aided by strong growth in both land and offshore activity for most technologies and strong product sales for completions, software and multi-client seismic, including all product groups.

Total revenue of $10.97 billion also surpassed the Zacks Consensus Estimate of $10.82 billion, and grew an impressive 21% from the year-earlier level of $9.07 billion.

For fiscal 2011, Schlumberger registered a revenue growth of 44% to $39.54 billion from $27.45 billion in 2010. Income from continuing operations, excluding charges, came in at $4.97 billion in 2011.

Segmental Highlights

Oilfield Services: Segmental revenues were up 21% year over year and 8% sequentially to $10.3 billion in the fourth quarter. Pre-tax operating income of $2.17 billion, soared 28% year over year and 12% sequentially in the fourth quarter.

The sequential growth can be attributed to significant multi-client seismic sales and mobilization of a second wide-azimuth seismic fleet. In particular, North America exhibited a strong growth in high-technology services in the deepwater areas of the Gulf of Mexico, which recorded solid operational performance. Price improvements in wireline and drilling related product lines, both on land and offshore also attributed to the growth.

In the international arena, deepwater and exploration activity, particularly in East and West Africa along with strong land activity in the Middle East and North Africa gained traction.

Distribution: Revenue for this segment decreased 2% sequentially but increased 19% year-over-year to $685 million in the fourth quarter. However, pre-tax operating income declined 14% sequentially but improved 26% year over year to $26 million in the fourth quarter.

Capital Expenditure, Balance Sheet & Share Repurchase

As of December 31, 2011, the company had approximately $4.8 billion in cash and short-term investments and $8.6 billion in long-term debt, representing a debt-to-capitalization ratio of 21.4% (versus 21.6% as reported in the previous quarter).

During the quarter, Schlumberger purchased 9.2 million shares for approximately $635 million, at an average price of $69.42.

Outlook

Schlumberger remains uncertain over the outlook for 2012 owing to the ongoing sovereign debt crisis in Europe that weighs down on Gross Domestic Product (GDP) and oil demand forecasts. However, going forward, Schlumberger is hopeful of demand improvement in select North American basins, as operators continue to focus on investing in exploring unconventional resources.

The oilfield services behemoth believes that bullish near-term U.S.land drilling trends, with activity driven by horizontal drilling and liquids-rich plays, will be supported by high oil prices.

Our Recommendation

Schlumberger shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We like Schlumberger’s lead position in the global oilfield services market, along with its technologically complex product and service offerings as well as its robust financial profile. Moreover, we believe the company will benefit in the next several quarters from the continued shift in drilling activity to liquids from gas and the restructuring of its U.S.land operations.

Importantly, integration with Smith is acting as a positive catalyst for Schlumberger with cost and revenue synergies expected to be more than the company’s expectation for the year. The Schlumberger-Smith drilling technique combination is boosting the company’s customers drilling results. It was also accretive to earnings per share in the quarter.

The company’s competitor, Halliburton Co. (HAL), the second-largest member of the oilfield services contingent, will report its fourth quarter earnings early next week.

However, Schlumberger'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, new technology and changes in economic conditions. Additionally, foreign currency fluctuation is also a threat to the company's profitability.

As such, we see the stock performing in line with the broader market and prefer to remain on the sidelines.

 
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