Schlumberger Earnings Preview: Watching For A Recovery In North American Operations

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is expected to announce its Q3 2013 results on October 18. We expect the company’s earnings to improve on a sequential as well as year-over-year basis, aided by strong global drilling activity and upstream capital spending, resurgent activity in the U.S. Gulf Of Mexico as well as a possibility of price stabilization in the U.S. land drilling market. Here is a brief overview of what to expect and what we will be watching when the company releases earnings Friday.

Trefis has a $88 price estimate for Schlumberger, which is almost in line with the current market price.

International Operations Should Continue To Perform Well

Schlumberger’s international operations, which account for about two-thirds of the firm’s total business, have performed consistently over the last few quarters, and we largely expect this trend to continue into this quarter as well for two reasons. Firstly, overall global drilling activity has remained strong with the average quarterly rig count during Q3 growing by over 2% since last year, while upstream capital spending has also been expanding. Global exploration and production capital expenditures are expected to grow by around 18% in 2013 to about $850 billion. ^[1] Secondly, Schlumberger has been focusing on a more favorable activity mix such as deepwater plays (which offer better pricing ) and has also been making some market share gains thanks to new technology deployments. Among Schlumberger’s geographic segments, we believe the Middle East and Asia segment will be the one to watch. During the last quarter, results from the region saw significant growth due to higher land and offshore activity in China, higher deepwater and unconventional activity in Australia, as well as growth in Middle Eastern markets such as Iraq, Saudi Arabia and the U.A.E. ^[2]

Possibility Of A North American Recovery

Schlumberger’s North American operations have been facing significant margin pressure over the last several quarters due to weaker gas directed drilling and a tough pricing environment for some onshore services including drilling, wireline and pressure pumping. However, we believe that operations in the region could begin to see a turnaround this quarter, thanks to efficiency improvements, stronger offshore drilling activity and a possibility of price stabilization, despite the fact that the average rig count over the quarter was slightly lower compared to last year.

Drilling efficiencies have been on the uptrend in most North American basins as oil companies have been deploying technologies such as pad drilling which are cutting down on cycle times and increasing the number of wells that can be drilled using a single rig. Additionally, service intensity has also been improving for some services such as fracking, with the number of frac stages per job rising steadily. Offshore operations will also prove to be a redeeming factor this quarter. As of the end of September, there were a total of 62 offshore rigs operating in the U.S. Gulf of Mexico, up by nearly 30% since last year. ^[3] We believe that Schlumberger’s OneSubsea joint venture which provides subsea technologies and the WesternGeco subsidiary which provides geophysical services could benefit from the increasing activity in this region.

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1. PR Newswire [↩]
2. Seeking Alpha [↩]
3. Baker Hughes North America Rig Count [↩]