Schlumberger Earnings Preview: Watching The North American Business

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Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is expected to release its Q1 2014 earnings on April 17. We expect the company’s earnings to improve on a year-over-year basis, driven by higher exploration and production activity in regions such as Africa, the Middle East, Asia Pacific and the U.S. Gulf of Mexico. During the Q4 2013, Schlumberger revenues grew by around 7% year-over-year to about $11.9 billion, while net income was up by around 22% to about $1.66 billion. [1] In this note, we take a look at some of the factors that could influence the company’s North American business.

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Schlumberger expects to see global exploration and production spending rise by roughly 6% in 2014, supported by an improving global economy, rising oil demand and relatively stable crude oil prices. Additionally, a greater portion of capital expenditures by oil companies is expected to be directed towards well services, rather than towards larger infrastructure projects. This could potentially translate to better business for big oilfield services companies, including Schlumberger. However, the North American market for oilfield services could grow at a slower rate due to lower gas-based drilling, which has hurt the fracking market, as well as due to some downward pricing pressures for many land-based oilfield services. Like most large oilfield services companies, Schlumberger’s North American business has been witnessing some sluggishness over the last few quarters and the region continues to be dilutive to the company’s overall margins. During Q4 2013, the North American segment had pre-tax margins of around 19.6% as compared to around 22% for the overall oilfield services business. [2]

Pressure Pumping Market Share Gains

Pressure pumping is one of Schlumberger’s most important product lines in the North American market. Although the broader fracking and pressure pumping market continues to reel under an oversupply of horsepower, Schlumberger has been making some market share gains due to new technology deployments. For instance, the company has been deploying its proprietary “hi-way” fracking technology, which significantly cuts down on the amount of proppant and water used in the fracking process. The overall number of fracking stage counts performed by the company could also trend upwards, as oil and gas companies have been tapping into shale reservoirs with more challenging and complex geologies.

Rising Rig Count In The U.S. Gulf Of Mexico

Activity in the offshore U.S. Gulf of Mexico is also expected to have been strong through the quarter. The average rig count in the Gulf has risen from around 50 in Q1 2013 to about 54 in Q1 2014, according to data from Baker Hughes. Schlumberger’s reservoir characterization and drilling product lines are likely to benefit from the higher rig count in the region. Going forward, we believe that Schlumberger’s subsea joint-venture with Cameron “One Subsea” as well as its seismic offerings (which could benefit from future  exploration activity in the lower tertiary region) could prove to be key growth drivers for the company in the Gulf of Mexico region.

Notes:
  1. Schlumberger Q4 2013 Earnings Press Release , Schlumberger, January 2014 []
  2. Schlumberger 2013 Form 10-K []