Schlumberger Q2 Preview: Scale And Technology Should Provide An Edge As Upstream Activity Increases

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is expected to release its Q2 2014 earnings on July 18. The company’s earnings have consistently beaten market expectations over the last four quarters and we expect to see another strong set of numbers for Q2 as well. Some of the key trends that could drive the company’s earnings include higher exploration and production activity in key geographic markets, continued market share gains and an improving operational performance. During the Q1, the company’s quarterly revenues grew by around 6% year-over-year to about $11.3 billion, while income before taxes grew by roughly 28% to around $2.07 billion. ^[1] Here is a brief look at some of the factors that we believe will drive the company’s earnings.

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Higher Global Exploration And Production Activity

Worldwide hydrocarbon exploration and production activity, which is a key revenue driver for oilfield services companies, is likely to have remained upbeat through much of the second quarter. Overall exploration and production spending by oil and gas companies is expected to outpace global GDP growth over the next few years, growing at a rate of roughly 6% to 7% per year.  This spending is supported by a reasonably favorable oil and gas pricing environment, which provides oil companies acceptable economic returns in most geographic regions. According to data from Baker Hughes, the total worldwide rig count rose by roughly 6% year-over-year for the first two months of Q2, with activity in the Eastern Hemisphere proving to be particularly strong. ^[2]

The Middle East saw its rig count rise by roughly 15% year-over-year, on the back of strong gas-directed activity in Saudi Arabia and some rig mobilizations in Iraq, while the number of active rigs in Europe also grew by about 15% driven by higher drilling in markets such as Turkey. Africa has also seen strong growth, with the rig count rising by about 11%, led by offshore activity in Angola and significantly higher onshore drilling in Kenya. The North American market, which had been facing some headwinds over the past two years, could also see some improvement owing to better demand for pressure pumping services and higher drilling efficiencies that allow a larger number of wells to be completed using a single rig. The rotary rig count in the U.S. was up by nearly 5% year-over-year during the first two months of the quarter.

Favorable Customer Mix And Possible Market Share Gains

We believe that Schlumberger could benefit significantly from these trends and outgrow the broader oilfield services market, owing to market share gains and a favorable mix of customers. The company’s new technology sales have been growing and the company has also been expanding its integrated services activity. Schlumberger is the technology leader in the oilfield services space and its new and differentiated products typically bring in better margins compared to existing products that are in the market. The company expects new technologies to contribute more than a quarter of revenues by the year 2017.

Schlumberger’s customer mix could also prove beneficial since the company has previously indicated that its sales to national oil companies and independent oil companies now account for about 70% of its total revenues, while revenues from international oil companies have remained relatively flat. This is likely to be a positive trend, since NOCs together hold over 80% of the world’s proven oil reserves. NOCs  are expected to account for a greater proportion of global exploration and production spending going forward, as many oil majors such as BP (NYSE:BP) have been slowing down on their expansion plans as they focus on improving shareholder returns.

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1. Schlumberger Q1 2014 Earnings Press Release, Schlumberger, April 2014 [↩]
2. Rig Count, Baker Hughes [↩]