Schlumberger’s Offshore And Overseas Earnings To Offset U.S. Gas Drilling Weakness

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is expected to release its second quarter results on July 19. While the going continues to be tough in the North American drilling market with the U.S. natural gas rig count falling to its 18-year lows during the quarter, we believe that Schlumberger’s strength in international markets can help to make up for the weakness in North America. During the first quarter, the company’s revenues grew by around 7% year-over-year to around $10.6 billion while net income declined by around 3% to $1.26 billion. ^[1] Here’s what to look for when the company releases earnings.

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North America: Weak Gas Based Drilling, But Gulf Of Mexico Should Perform Well

Weak Gas Drilling And Pricing Pressures: While the overall rig count in North America increased marginally this quarter due to growth in oil based drilling, the gas drilling landscape remained challenging with the gas directed rig count in the United States falling to 18 year lows of around 353 in June. This will have an impact on demand for services such as pressure pumping, which are used in shale gas wells and is likely to put downward pressure on pricing as well. The pressure pumping product line contributes around $10 billion to Schlumberger’s revenues and is one of the company’s most important product lines. ^[2] During the company’s second quarter conference call, the management was decidedly cautious in its outlook for the North American market this year, indicating that pricing could prove to be an issue for some services across its product line.

U.S. Gulf Of Mexico Business Expected To Grow: We believe that Schlumberger’s operations in the U.S. Gulf of Mexico (GoM) could do well this quarter since the total number of rigs in the region has increased by around 20% year-over-year to around 55. ^[3] Operations during this quarter in the GoM are expected to have been relatively smooth, unlike in Q1 when maintenance related delays on offshore rigs temporarily stalled operations and hit revenues. Schlumberger has also been making a big push into the subsea technologies space through acquisitions joint ventures. (See Also: Why Schlumberger Is Salivating For Subsea Technologies) These deals could help the company strengthen its presence in the GoM, which is one of the most important deepwater markets in the world. The GoM is also proving to be an attractive market from a growth standpoint since the U.S. Department of the interior has been auctioning new drilling leases in the region, and this could further boost demand for oilfield services in the region.

International Operations

Schlumberger’s international operations have helped the company offset the weakness in the North American drilling market over the past few quarters and we believe that this quarter isn’t going to be any different. Schlumberger’s operations are globally diversified and it derives nearly 70% of its revenues from overseas unlike its counterparts Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI), who derive a bulk of their revenues from the U.S. Market. The company expects global exploration and production spending to grow by around 10% this year and anticipates that its international operating income will exceed this growth due to a favorable activity mix. While the international rig count has held relatively steady this year, we believe that an increase in offshore drilling, particularly in Africa and Latin America could help the firm’s results during the quarter.

Although we believe that security concerns could continue to hinder North African operations, countries in Sub-Saharan Africa should perform well. In Angola for instance, Schlumberger has seen an increase in Marine seismic operations due to growing offshore drilling activity. Results from Europe’s North Sea, one of the world’s largest and most sophisticated offshore drilling markets, could also be encouraging, as there has been a transition from exploration to development and production related activity in many wells. In Latin America, drilling activity in traditionally large offshore markets such as Brazil has remained relatively flat. However, Mexico has seen a sharp increase in offshore drilling, with the number of rigs growing from around 23 in January to around 41 in May. This could potentially open up new opportunities for Schlumberger.

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1. Schlumberger Press Release [↩]
2. Howard Weil [↩]
3. Baker Hughes Rig Count [↩]