Schlumberger Q3 Preview: North America In Focus

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Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is expected to release its Q3 2014 earnings on October 16, reporting on a quarter that saw reasonably strong global exploration and production activity. Although Schlumberger’s stock price has tanked by over 20% over the last three months owing to declining oil prices, we expect the company to post a strong set of numbers, with earnings growing year-over-year driven by strong rig activity in North America, the Middle East and Asia. During the second quarter, the company saw its revenues grow by around 7.7% year-over-year, while adjusted income from continuing operations (a non-GAAP measure) increased by 17% year-over-year. In this note, we take a look at the key factors that are likely to drive the company’s performance in the North American market.

Trefis has a $135 price estimate for Schlumberger, which is about 48% ahead of the current market price.

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Strong U.S. Drilling Activity

While Schlumberger has typically focused on international markets, which account for about two-thirds of its revenue, it has been making an aggressive push to gain market share in the fast growing U.S. market. Over the last quarter, the land-based rig count in the U.S. rose by about 3% sequentially to touch a two-year high of 1,869, while the well count has also seen strong growth, rising by around 5% year-over-year. Offshore activity also remained reasonably strong through the quarter, with the average quarterly rig count in the U.S. Gulf of Mexico up from 58 last year to 61. [1]

Pressure Pumping, Drilling and Artificial Lift

We expect Schlumberger’s pressure pumping operations to be a key driver of earnings for the quarter, given the strong activity directed at unconventional plays in the U.S. The pressure pumping markets have seen a recovery over the last few quarters, reaching a point where service providers in certain basins have had to turn down customers due to a lack of capacity. [2] Schlumberger’s pumping business has been seeing a strong uptake of late, led by some market share gains, better operational efficiencies and new technology introductions. The company was one of the first among the large oilfield services players to add extra capacity in response to strong demand. However, a key factor to watch for the pumping business is pricing. While Schlumberger had reported sequentially higher pricing for pumping services in some newer basins during Q2, the broader pumping market did not see much of an improvement. [3]

Schlumberger’s drilling and artificial lift product lines are also likely to have seen some growth in the United States through the quarter. The company is the largest manufacturer of drill bits and is also the largest player, by far, in the directional drilling space. Given that the horizontal rig count grew by around 22% year-over-year during Q3, it is likely that the drilling business saw an uptick in demand.

Crude oil production in the United States has been trending upwards owing to higher production from regions such as the Bakken and Eagle Ford shales. As of the end of September, U.S. field production of crude rose by around 11% year-over-year to around 8.8 million barrels per day. [4] Schlumberger’s artificial lift business could get a boost owing to the stronger oil production as well as some recent acquisitions that the company made in the rod-lift space. Artificial lift equipment is used on oil wells to increase pressure within the reservoir and stimulate oil to flow onto the surface.

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Notes:
  1. North American Rig Count,  Baker Hughes []
  2. Four Picks to play Strength in Pressure Pumping, Barrons, September 2014 []
  3. Schlumberger’s (SLB) CEO Paal Kibsgaard on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, July 2014 []
  4. Weekly U.S. Field Production of Crude Oil, U.S. EIA []