North America Slowdown Will Temper Schlumberger’s Results

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Schlumberger (NYSE:SLB) will release its Q2 results on July 20, reporting on a quarter that saw a sharp drop in the price of American natural gas and global oil prices. Earnings of oilfield services firms like Schlumberger are closely linked to oil and gas prices because of their impact on upstream exploration activity. The weekly rig count in the U.S. saw a drop last week, falling by 12 rigs as an increase in rigs directed toward oil was more than offset by a decline in the gas rig count. [1] In recent weeks, oil prices have also seen a decline because of weak economic news from Europe and China. Schlumberger  may also be impacted by the rising input costs that could dent its margins for Q2.

We are looking to revise our $93 price estimate for Schlumberger, which is at a 40% premium to its current market price.

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North America

The upswing in onshore exploration activity in North America driven by drilling in shale plays is responsible for much of the growth in the oilfield services sector over the past few years. However, low natural gas prices and a drop in U.S. benchmark crude prices could result in a slowdown in activity in the industry. The slowdown could also affect the pricing scenario in the market as a concentration of industry capacity on liquid plays results in overcapacity.

Lower activity is also forcing oilfield services players to absorb rising input costs, in particular, the cost of gaur, a key raw material used in fracking fluid, which has sky-rocketed. This is expected to pull down the margins in the North American region. A rise in exploration and production (E&P) activity in the U.S. Gulf of Mexico could have a positive impact on the revenues and profits in the North America geography.

International markets

Schlumberger has lower exposure to the American market than many of its peers. This could help it minimize the impact of the slowdown in the region. E&P activity in most international markets is expected to see growth or remain steady. The international rig count published by Baker Hughes for the month of May increased from 1,151 last year to 1,225. [1] The rig count recorded an annual increase in almost all geographies except in the Asia Pacific region. We expect Schlumberger to post robust growth in these geographies for Q2.

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  1. Baker Hughes Rig Count, Baker Hughes [] []