Schlumberger Q4 Preview: Expect Earnings Growth, Tough Outlook

Schlumberger (NYSE:SLB), the largest oilfield services provider, is expected to report its Q4 2014 earnings on Friday, January 16, reporting on a quarter that saw the company’s stock price fall by over 15% on the back of plummeting benchmark crude oil prices. While we do not expect the current oil pricing environment to have worked its way into Schlumberger’s earnings yet, given the long planning horizons and contract-driven nature of the services industry, the company’s near-term outlook does look challenging. We expect the company’s adjusted earnings for the quarter to increase on a year-over-year basis, driven by higher activity in Asia-Pacific and the United States. However, the company’s GAAP earnings will be impacted by a pretax write-down of $800 million, related to a plan to reduce the size of its WesternGeco marine seismic fleet. In this note, we take a look at what to expect from Schlumberger during the quarter.

Trefis has a $105 price estimate for Schlumberger, which represents a 29% premium to the current market price.

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Schlumberger’s North American business is likely to be a key driver of the company’s adjusted earnings growth for the quarter. Oilfield services activity in the United States is likely to have remained strong through Q4. According to data from Baker Hughes, a total of 9,544 onshore wells were drilled in the United States, marking a 5% year-over-year increase. Product lines such as pressure pumping and directional drilling are likely to have seen some growth, owing to higher unconventional activity in areas such as the Permian basin. The artificial lift business could also see some growth, driven by some recent acquisitions that the company made in the rod-lift space. On the offshore front, Schlumberger could see some growth on the back of market share gains for drilling services in the U.S. Gulf of Mexico. However, we believe that reservoir characterization, which is one of Schlumberger’s most profitable product lines, is likely to see flat-to-declining revenues owing to potentially lower interest in exploration-related activity. On the international front, activity in the Asia-Pacific region is likely to have seen a slight increase year-over-year on the back of a growing rig count and stronger offshore activity.

Expect A Tough Year Ahead

Benchmark Brent crude oil prices have fallen to levels of around $50 per barrel, touching five and a half year lows, owing to a sluggish outlook for global oil demand growth and strong supplies from U.S. shale oil fields. Prices could remain under pressure through 2015 as well, due to further growth in U.S. production. Analysts at Goldman Sachs recently lowered their three-month price forecast for Brent crude to $42 a barrel. ^[1] The situation doesn’t bode well for the oilfield services industry, since oil and gas companies are seeing their cash flows come under significant pressure, leading them to become more circumspect about their upstream spending plans. While most oil and gas players have yet to provide their capital expenditure budgets for 2015, some companies that have provided guidance – such as ConocoPhillips and Malaysia’s Petronas – indicate that we could see capex cuts of at least 20%. Activity directed towards shale and tight oil plays is likely to take the biggest cut, given the higher marginal production costs, shorter investment planning cycles and also due to the fact that many smaller drillers are highly leveraged. This is likely to weigh on Schlumberger’s top line and margins this year. Additionally, customers are likely to have better leverage in contract negotiation and extensions, potentially hurting margins over the near-to-medium term.

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1. Oil prices extend falls; Goldman Sachs slashes price forecasts, Reuters, January 2015 [↩]