Business remains tough in the North American drilling landscape according to oilfield services bellwether Schlumberger (NYSE:SLB). Speaking at an industry event on Monday, CEO Paal Kibsgaard mentioned that a slower than expected recovery in drilling activity and weak pricing have resulted in an uncertain outlook in the North American market.  He also indicated that Schlumberger is reducing its work in Venezuela as it is struggling to collect due payments from oil companies in the region. While we believe that these developments could hit Schlumberger’s Q1 earnings, we remain bullish on the firm’s long-term prospects thanks to its global footprint and growing offshore capabilities. We have a price estimate of $89 for Schlumberger, a 20% premium over its current market price.
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Lower North American Activity Could Hit All U.S. Oil Field Service Cos.
Drilling activity in North America has been sluggish for some time now as low natural gas prices caused gas directed activity to plummet from around 663 active rigs to around 431 active rigs over the past year. While the oil rig count has shown some growth, it hasn’t been enough to offset the gas drilling plunge. As of last week, North America had a total of 2279 active rigs, 10% lower than last year.  Pricing also has come under pressure due to lower demand and a higher supply of equipment used for gas drilling.
While this could hit Schlumberger’s Q1 earnings, we believe it could have a more pronounced impact on the other two large oil service firms Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL). While Schlumberger derives roughly a third of its revenues from the North American market, Baker Hughes and Halliburton depend on the region for more than half their business.
GoM Maintenance Work And Slowdown In Venezuelan Billing
The U.S. Gulf of Mexico (GoM) was a bright spot in Schlumberger’s North American operations last year as it helped to soften the blow of lower land-based drilling. However, the firm mentioned that first quarter activity here was temporarily slowed down by maintenance work on deepwater rigs. While this could hit Schlumberger’s Q1 performance, we only view this as a short-term setback.
Schlumberger is slowing down its work in Venezuela since it is having trouble collecting payments from the state-controlled Petroleos de Venezuela SA (PDVSA). The firm intends to slow down revenue recognition in Venezuela, in line with its collections. PDVSA is known to scale back on its payments depending on oil prices and also as the government taps into the firm’s funds for other spending purposes.  Since Venezuela holds the world’s largest oil reserves and requires services from the likes of Schlumberger to tap into these resources, we do not believe that business in the country will be impacted in the long run. The decision to slow down work is a prudent move as it will reduce the firm’s risk and also force customers to pay up.Notes: