North America Drives Schlumberger’s Q3

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, reported a strong set of Q3 2014 earnings that beat market expectations. The company reported that all its geographic markets witnessed revenue growth, driven by strong global upstream activity, the penetration of new technologies and strong execution on projects. Its performance in North America proved to be particularly strong, driven by  increasing rig activity in the United States and a seasonal recovery in Canada. Quarterly revenues grew by around 9% year-on-year to $12.65 billion, while net income rose by around 13.6% to $1.95 billion. Here’s a brief overview of the company’s earnings and what to expect going forward. ^[1]

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We have a $135 price estimate for Schlumberger, which is about 50% ahead of the current market price.

North America Drives Results

Schlumberger has the lowest exposure to North America, in terms of revenue mix, among the large oilfield service providers that we cover. However, the company has been doubling down on the market of late, as it seeks to capitalize on the projected growth in U.S. crude oil output. For this quarter, the company saw its North American revenues grow by around 9% sequentially to about $4.3 billion, while pre-tax margins rose to 19.3% from around 18% last quarter.The offshore business saw particularly strong growth, with revenues rising by around 12% sequentially on the back of higher activity in eastern Canada as well as due to market share gains in for drilling services in the U.S. Gulf of Mexico. In the land markets, the company benefited from a rebound in activity following the seasonal spring break-up in Canada and also due to higher stage counts for pressure pumping operations. Schlumberger’s pumping business has been seeing recovery over the last few quarters led by higher unconventional activity, better operational efficiencies and new technology introductions. The company’s artificial lift business also saw sequential growth, owing partly to 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.

Declining Crude Oil Prices

Brent crude, the global benchmark for crude oil, has approached 4-year lows of around $83 a barrel owing to concerns of slowing consumption growth and strong supplies from U.S. shale oil fields and a recovery in production in Libya. The current pricing environment has been weighing significantly on the stock prices of most oilfield services companies, amidst concerns that  exploration and production activity and upstream capex spending could take a hit if oil and gas companies face revenue pressures. Schlumberger’s stock was particularly badly hit, falling by about  20% over the last 3 months, likely due to concerns that demand for its high-technology service offerings for areas such as ultra-deepwater and unconventionals could decline. However, the company sought to ease concerns of the potential future impact of the crude oil price decline in the commentary provided in its press release, indicating that it holds the view that demand-supply situation in the oil markets could become “relatively well-balanced”, while noting that it maintains its long-term view of seeing solid demand for its products and services.

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1. Schlumberger Earnings Press Release, Schlumberger, October 2014 [↩]