Schlumberger Has Solid Q3 On International Upstream, North American Drilling

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, reported strong third quarter earnings on October 18. The company’s performance was aided by robust international upstream activity as well as improving efficiencies and offshore drilling in North America. While quarterly revenues grew by around 10% year-over-year to around $11.6 billion, income from continuing operations grew by 26% to about $1.7 billion. ^[1] In this note we take a look at some of the factors that influenced the company’s results and what to expect going forward.

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Schlumberger’s North American business performed well this quarter, with revenues growing about 9% over last year to a historical quarterly high of $3.6 billion while margins (before taxes) rose to about 20% from around 18.5% in the same period last year. Although the average rig count in North America remained about 10% lower when compared to last year, Schlumberger has been benefiting from increasing efficiencies, better utilization rates as well as lower raw material costs for the pressure pumping product line. Activity in the U.S. Gulf of Mexico also remained strong as the company has not faced much of a slowdown due to the hurricane season.  The average rig count in the Gulf has risen from around 48 in Q3 2012 to about 58 in Q3 2013. ^[2] Schlumberger has been strengthening its offshore and deepwater business over the past few years and has been one of the main beneficiaries of the increasing offshore activity in the Gulf.

Schlumberger has also been making some market share gains in North America owing to new technology deployments. On the pressure pumping front, the company recently activated 4 additional fracking fleets and mentioned that its total fracking stage count increased by around 7% sequentially. Schlumberger has been deploying its proprietary fracking technology called “hi-way” over the past several quarters. The technology helps to significantly cut down on the amount of proppant and water used in the fracking process. ^[3] However, despite the increasing activity, the broader pressure pumping market remains oversupplied and the company has mentioned that pricing headwinds still persist although the rate of decline is slowing.  ((Seeking Alpha))

International Results Driven By Eastern Hemisphere Activity

Schlumberger’s international operations continued their steady performance as global exploration and production spending remained strong. International revenues grew by around 11% over the same period last year while margins grew from around 21% to about 23%. The Asia Pacific and Middle East division emerged the strongest performer, with revenues increasing by around 25% year-over-year while margins expanded by 3% to around 26%. Schlumberger’s Europe, CIS and Africa segment also did well with revenues growing by around 7% on a year-over-year basis while margins grew by around 1%, thanks in part to the peak summer drilling and exploration activity in Russia and Central Asia. ((Schlumberger Press Release))

In the Middle East, activity in Saudi Arabia, the United Arab Emirates and Iraq continued to rise while growth in Asia was spearheaded by tight gas and conventional gas directed activity in China. The company is in the process of moving additional manpower and equipment into Saudi Arabia and also mentioned that it had completed a significant mobilization relating to a recent contract win in the U.A.E. ^[4] These mobilizations should help to improve the company’s earnings going forward.

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1. Schlumberger Press Release [↩]
2. Baker Hughes Rotary Rig Count [↩]
3. Reuters [↩]
4. Seeking Alpha [↩]