SLB Schlumberger Ltd

The world’s largest oilfield services provider Schlumberger Ltd. (SLB) has reported first quarter 2012 earnings of 98 cents per share (excluding special items), beating the Zacks Consensus Estimate by a penny. The quarter’s results also showed a steady improvement from the year-earlier profit of 71 cents per share.

Income from continuing operations, excluding charges, stood at $1.31 billion, up 35% year over year but declined 12% sequentially. The year-over-year increase was aided by strong performance in global exploration and deepwater activity as well as efficiency in operations. However, the sequential decline was mainly due to usual seasonal slowdown in product, software and multiclient sales.

Total revenue of $10.6 billion was at par with the Zacks Consensus Estimate of $10.6 billion, and grew an impressive 22% from the year-earlier level of $8.7 billion.

Segmental Highlights

Oilfield Services: Segmental revenues were up 22% year over year but decreased 4% sequentially to $9.9 billion in the first quarter. Pre-tax operating income of $1.9 billion, soared 33% year over year, but fell 10% sequentially.

The year-over-year revenue growth can be attributed to North America, in particular, which 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 contributed to the growth.

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

Distribution: Revenue for this segment increased 4% sequentially and 19% year over year to $713 million in the first quarter. Pre-tax operating income jumped 32% sequentially and 56% year over year to $35 million.

Capital Expenditure, Balance Sheet & Share Repurchase

As of March 31, 2012, the company had approximately $4.1 billion in cash and short-term investments and $8.4 billion in long-term debt, representing a debt-to-capitalization ratio of 20.6% (versus 21.4% as reported in the previous quarter).

During the quarter, Schlumberger purchased 4.4 million shares for approximately $324 million, at an average price of $74.01.

Outlook

Schlumberger remains upbeat about 2012 owing to the positive outlook for the international markets. The company expects an increase of 10% in its rig count in 2012 with robust exploration and deepwater activity. Schlumberger’s strength also lies in effective implementation, strong contracts and new technologies. However, Schlumberger remains skeptical about the North American dry gas drilling and pressure pumping pricing scenario.

The oilfield services behemoth believes that balanced land portfolio and strong leverage to the deepwater segment will help it in performing well, in the coming years.

Our Take

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 leading position in the global oilfield services market, along with its technologically complex products and service offerings and 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, Schlumberger expects an increase in technology introductions throughout 2012, a rise in pricing of seismic and high seismic vessel utilization and a continuous shift toward performance-based contracts. The new alliance with Petrofac also bodes well for future growth in margin and market share.

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.

The company’s competitor, Halliburton Co. (HAL), the second-largest member of the oilfield services contingent, reported better-than-anticipated first quarter 2012 results aided by the strength and sustainability of the all-important North American onshore activity levels (to which the company is heavily leveraged through its market-share-leading pressure-pumping business). Halliburton’s earnings per share and revenues edged past the Zacks Consensus Estimates.

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

 
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