SLB Schlumberger Ltd

On Jan 31, we reaffirmed our Neutral recommendation on the leading oilfield services company Schlumberger Limited (SLB), following its fourth quarter results. The company’s strong performances in the Gulf of Mexico (GoM) region, its international reach and diverse product offerings were offset by weak performance in Europe/CIS/Africa and Middle East & Asia.

Why the Reiteration?

The company reported its fourth quarter financial results on Jan 18. Adjusted earnings of $1.08 per share came in line with our expectation but decreased 1.8% from the year-earlier quarter.

Although hydraulic fracturing pricing and land drilling activity remain depressed throughout North America, outperformance in the GoM helped the offshore business. It posted a 24% sequential rise in revenues in the GoM bolstered by rising deepwater rig activity and a seasonal rise in year-end, multi-client seismic sales.

In the international arena, although the company experienced a somewhat choppy fourth quarter due to transitory issues, we expect activity levels to increase and enjoy healthy growth throughout 2013. International pricing continued to improve last quarter attributable to new technology sales and small-to-mid sized contract bidding.

Schlumberger expects its international spending on exploration and production to climb 10% this year. The company aims for continued margin improvement internationally with Russia and Australia being the major sources of strength in the coming quarters.

The company’s exposure to growing deepwater activity through its core services and seismic capabilities also positions it well to continue generating industry-leading international margins. Schlumberger generates about two-thirds of its revenue internationally, marking the highest ratio among the biggest oilfield service providers, which include Halliburton Co. (HAL) and Baker Hughes Inc. (BHI).

Despite this, our primary concern remains the fact that the company’s North American land continued to weaken in the U.S. and Canada. Its near-term outlook on U.S. land also remains subdued with lingering weakness in pressure pumping.

We see no earnings momentum for the stock over the last 7 days for the first quarter of 2013 as well as full-year 2013. The Zacks Consensus Estimates for the first quarter and full-year 2013 are currently pegged at $1.01 and $4.76 per share, reflecting a year-over-year increase of 3.4% and 14.1%, respectively.

Other Stock to Consider

Currently, shares of the world’s largest oilfield services provider, Schlumberger, retain a Zacks Rank #3 (Hold).

However, there are certain other oilfield service providers like Hornbeck Offshore Services Inc (HOS) that offer value and are worth buying now. The company sports a Zacks Rank #2 (Buy).

 
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