Schlumberger Has A Good Q4 On International Ops, But North American Pricing Pressures Persist

by Trefis Team
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Schlumberger Limited
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Schlumberger (NYSE:SLB), the world’s largest oilfield services company, reported a good set of Q4 2013 numbers on January 17, driven by robust international exploration and production spending. Quarterly revenues were up by around 7% year-over-year to about $11.9 billion, while net income was up by around 22% to about $1.66 billion.((Schlumberger Press Release))  The company’s international businesses continued to be the driving force behind its performance, while North America remained somewhat lackluster as pricing for land-based services stayed depressed. Here is a brief overview of some of the factors that drove the company’s performance and what to expect going forward.

Trefis will be updating its valuation model and price estimate for Schlumberger to account for the recent earnings release.

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Overview of Results

Schlumberger’s international operations, which account for around two-thirds of its overall revenues, continued to do well  on the back of a well-rounded performance from all the company’s geographic segments. International revenues touched an all time high of around $8.15 billion while income before taxes grew by around 25% to about $1.90 billion compared to the last year . The company’s Middle East and Asia-Pacific operations saw particularly strong growth, with revenues rising by around 18% and profit before tax margins climbing to about 26%, compared to around 22% in Q4 2012. Schlumberger has been seeing strong activity in Saudi Arabia, where it has been moving additional manpower and equipment, and in the United Arab Emirates where activity is at a record high following a recent contract win. In Asia, growth was spearheaded by strong seismic activity in Malaysia, higher land and offshore services in Australia as well as the tight gas production management project in China. The company said that its new technology sales remained strong across its three product lines – reservoir characterization, drilling and production – and it has been seeing some market share gains as well owing to this.

Schlumberger’s North American business saw its revenues grow by around 6.5% compared to last year, although  margins remained relatively flat at around 19.6%. The segment is currently dilutive to Schlumberger’s overall margins as pricing continues to pressure margins. The company indicated that it had seen downward pricing pressure for most of its product line and this was augmented by the renegotiation and roll over of some key contracts. [1] However, the business also saw many positive developments owing to  higher deepwater activity in the U.S. Gulf of Mexico, market share gains for the hydraulic fracturing line in the United States as well as efficiency improvements for drilling and fracking.

Outlook for 2014

For 2014, Schlumberger expects to see exploration and production spending grow by roughly 6% driven by an improving global economy, rising oil demand and relatively stable crude oil prices. Additionally, more investment is expected to be directed towards well services rather than towards larger infrastructure projects, potentially translating to better business for large oilfield services companies like Schlumberger. The company expects activity levels to rise across North America owing to more deepwater rigs in the Gulf of Mexico as well as stronger land based activity. However, pricing pressures could dampen the overall impact of higher activity on revenues and margins, and the market could grow at a slower pace compared to the global oilfield services market. Coming to international markets, regions such as Argentina, sub-Sahara Africa, Russia and Saudi Arabia, Iraq, the United Arab Emirates and China are expected to drive growth. Once again, new technology deployments are expected to help the company improve its pricing power and make market share gains. For 2014, the company is targeting double-digit growth in its earnings per share on the back of new technology deployments and efficiency gains. [1]

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Notes:
  1. Seeking Alpha [] []
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