Schlumberger’s Q2 Results Aided By Eastern Hemisphere Activity

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Schlumberger (NYSE:SLB), the world’s largest oilfield services company, published its Q2 2014 earnings on July 17, reporting a set of numbers that beat market expectations. The company’s results were driven by higher exploration and production activity  in the Eastern Hemisphere and stronger demand for the company’s drilling and production related product lines. Quarterly revenues grew by around 7.7% year-over-year to around $12.05 billion, while the adjusted income from continuing operations (a non-GAAP measure) increased by 17% year-over-year to around $1.8 billion. [1]  On a GAAP basis, income fell by about 13% due to an difficult comparison with last year when the company recorded a one-time gain from the formation of the OneSubsea joint venture. In this note, we take a brief look at some of the factors that drove the company’s earnings for the quarter.

Trefis has a $124 price estimate for Schlumberger, which is about 8% ahead of the current market price.

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Eastern Hemisphere Drives  Growth

Schlumberger’s Middle East and Asia segment saw revenues rise by around 11.7% year-over-year to around $2.96 billion, while pre-tax margins expanded to around 28% from about 24.6% a year ago. The results were driven by higher exploration and drilling activity in Australia and higher offshore development activity in China. China has seen its offshore rig count surge by about 40% year-over-year. In the Middle East, regions such as Saudi Arabia (which has seen a spurt in gas directed drilling) and the United Arab Emirates (where Schlumberger’s seismic and drilling activity has been strong) drove growth.

The company’s revenues in the Europe/CIS/Africa geomarket grew by around 4% year-over-year while margins also expanded from around 20.5% to roughly 22%. The improved results were attributable to  higher exploration activity in sub-Saharan Africa and a sequential rebound in activity levels in Russia and Norway. The company also won some notable contracts in the Eastern Hemisphere, including a major five-year contract from BP to supply drilling and completions products and services for a project in Oman.

North American Revenues Soar On Onshore Activity, But Margins Dip

Schlumberger’s revenues from North America grew by around 15% year-over-year to about $3.89 billion owing to higher activity in the broader U.S. oilfield services market and some  market share gains that Schlumberger was able to make in the land market. The average land based well count in the U.S. has risen by around 4.3% year-over year, while the offshore rig count is up by around 7% year-over–year to around 56 rigs. Margins, on the other hand, fell from around 19.7% a year ago to around 18%. While the company did not highlight the reason for the year-over-year margin decline, we believe that it could be due to lower pricing for the pressure pumping product line and higher costs related to commodities used in pumping services.

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Notes:
  1. Schlumberger Q2 2014 Earnings Press Release, Schlumberger, July 2014 []