International Focus Enables Schlumberger To Report Better-Than-Expected 2Q Results

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, kick-started the earnings season on Thursday, 16th July 2015, reporting better-than-expected results for the second quarter of 2015. Despite a meaningful decline in revenues, the company managed to exceed the market’s earnings estimate of $0.79 per share by posting a profit of $0.88 per share, due to its large exposure to the more resilient international markets. The company’s revenue fell 25% on a year-on-year basis to $9 billion((Schlumberger Announces June Quarter Profits, 16th July 2015, www.slb.com)), while its adjusted net income dropped to $1.1 billion, 30% lower compared to last year. While the short term outlook of the industry looks bleak given the sluggish drilling activity in the US, we expect Schlumberger to fare better than its competitors due to its limited presence in the North American markets. We take a quick look at the key highlights of the company’s second quarter earnings release and its outlook going forward.

Our price estimate for Schlumberger stands at $95 per share, which is approximately 13% ahead of the current market price. We will be updating our price estimate and rig count forecasts shortly.

See Our Complete Analysis For Schlumberger here

International Exposure Dampens The Effect Of Lower North American Land Activity

Schlumberger, the largest oilfield services company, reported a decline of over $3 billion in its quarterly revenue compared to the last year, due to the drastic fall in North American land activity and cost deflation caused by the plummeting crude oil prices. The company’s North American revenue plunged 39% on an annual basis, as the US oil rig count fell to 645 units at the end of the June quarter((Baker Hughes Rig Count)), its lowest levels since July 2011, due to large cut backs on the exploration budgets by oil companies. In comparison, Schlumberger’s international revenues dropped by only 19% on a year-on year basis since these markets are driven by conventional land and offshore drilling with lower break-even prices. Thus, the company’s large exposure (two-third of the total revenue) to the more resilient international markets softened the blow of declining North American drilling activity.

Further, with the erosion of the pricing power, Schlumberger’s North American margins experienced a severe hit and fell to 10.2% as opposed to the 18% margins generated in the same quarter last year. However, unlike its North American margins, the company’s international margins actually improved to 24.5% during the last quarter compared to the 24% margins generated last year. As a result, Schlumberger reported a margin of 19% on an operating income of $1.7 billion, which would have been much lower if the company had more exposure in the currently weak North American markets.

Going Forward

The near to short-term outlook of the oilfield services industry appears to be challenging. While the US oil companies have pulled back their productions, the OPEC continues to pump in more oil to create pricing pressure on its peers. Further, the recent Iranian nuclear agreement has added to the uncertainty of the supply and demand situation in the oil market. Consequently, Schlumberger now expects the spending by the US oil companies to fall by more than 35% in 2015, up from its previous projection of a 30% decline. However, the company seems to be optimistic about the North American oil rig count and expects to see a slow increase in land drilling and completion activity in the second half of the year.

Despite the bleak outlook for the industry, we expect Schlumberger to continue to outperform its peers going forward due to its limited exposure to the North American markets. Further, the company has been proactively managing its operating costs by cutting down its head count and using an innovative mix of products, which has prevented its margins from dropping drastically. This will help the company to sail through the uncertain oil price environment.

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