Schlumberger (NYSE:SLB), the world’s largest oil field services firm, will report its third quarter earnings on October 19. Here are a few factors that we believe will impact the company’s quarterly performance.

In the second quarter, the company reported sequential revenue growth of about 5%, with revenues from international operations growing by about 9% while revenues from North America declining marginally. We expect the trend of modest revenue growth to continue into the third quarter as well on continued international growth and enhanced pricing on recently negotiated contracts. However, we believe that margin growth may be sluggish due to pricing pressures in the North American market.

International Operations Expected To Deliver Strong Performance

Leveraging its globally diversified operations, we believe Schlumberger will stand to benefit from the encouraging international drilling landscape – the international rig count grew by about 6% since the beginning of the year despite weak macroeconomic cues in Europe and slowing growth in China. ((Baker Hughes Rotary Rig Count))

In Latin America, the company is expected to record strong growth in Brazil as a number of new rigs commissioned during the second quarter start actively contributing to the revenue stream. Given the growing potential for offshore services in Latin America, the company’s reservoir characterization and drilling divisions are expected to perform well, going forward.

We also expect Schlumberger to report encouraging numbers from its operations in the Middle East. In Iraq, the company secured several new contracts for which resources were being mobilized through the first half of the year. We believe the region will contribute positively to its third quarter results as work commences on these contracts. The growing land rig count in the UAE and increasing offshore activity in Saudi Arabia are also expected to bolster revenues in the region.^[1]

In China, a country with an almost insatiable need for energy, the company should see growing demand for high-end services as exploration and production activities move toward more complex conventional and unconventional plays. In Africa, operations are expected to receive a boost with the resumption of activity in Libya and increased exploration activity in Nigeria, Mozambique and Tanzania. Strong exploration activity in the North Sea will play a role in bolstering the firm’s performance in Europe. ((Schlumberger Q2 Earnings Call Transcript, Seeking Alpha))

North American Margins A Concern

Schlumberger is less dependent on the North American market compared to peers like Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI). The region accounts for about 32% of the company’s revenues. However, for this quarter, we expect the firm’s operations in the region to be a drag on its profitability.

Depressed natural gas prices in North America have caused the gas rig count to decline by around 48% this year. This has led to a glut in the supply of equipment used for hydraulic fracturing, resulting in severe price competition. According to PacWest consulting partners, prices of fracking services are expected to fall by another 14% this year, which could severely dent profitability.^[2]

The North American oil rig count grew by about 18% this year due to the increase in activity in the Gulf of Mexico and the shift of capacity from gas to liquid rich plays. Although this will help the company partially offset the effects of weak gas drilling, oil based drilling has also experienced some setbacks during the quarter due to poor weather conditions. Heavy rainfall in Canada caused drilling operations to be suspended while the Hurricane Isaac saw rigs in the Gulf of Mexico experience about two weeks of downtime between August and September.

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