Schlumberger Earnings Preview: What We’re Watching Thursday

The world’s largest oilfield services provider Schlumberger (NYSE:SLB) will announced its Q3 results on the 21st of October. Markets eagerly await earnings to gauge the actual performance of the company in a quarter that saw its stock fall by almost 30% since share price peaked at $94.70 in July this year. Other oilfield services providers such as Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) have seen similar drops in stock price as well, indicating that investors were looking to the exploration and production services industry with caution in light of the falling crude oil prices and growing macro economic concerns.

Schlumberger differs from other major competitors in that its revenues are a lot more diversified geographically which makes it less immune to local factors. We will watch its performance across major markets in the previous quarter to adjust our $107 price estimate for Schlumberger which is at a hefty 60% premium over its current market price.

See our full analysis for Schlumberger

Global worries eat into price

As mentioned earlier, Schlumberger’s stock price has taken a dive in previous months as markets expect low crude prices to limit exploration and production budgets across the industry. Low oil prices stifle the ability of firms to generate finances  for exploration.

While indicators such as the rig count in North America and many other markets are still showing healthy signs, the Asian market has shown a 10% annual decline in the number of active rigs in September signalling lower demand. (See:  Lower Rig Count in Asia Could Weigh on Schlumberger) High margins make the Asia and Middle East ‘geodivision’ of Schlumberger its most valuable business according to our analysis and therefore the company may be hit harder than its peers by the falling activity in the region.

Overall, we expect Schlumberger to perform well in other markets and especially in North America where expanding shale operations and resurgent activity in the Gulf of Mexico should bolster its earnings in the U.S. The chairman Andrew Gould also expressed hope that his company should return to strife hit Libya soon and start partial operations there in October which should benefit the overall financial results for the year. ^[1]

Regulatory risk may push up costs in future

The U.S. Department of Interior’s Bureau of Safety and Environmental Enforcement (BSEE) issued a 4 citations of violation each against service contractors Halliburton (NYSE:HAL) and Transocean (NYSE:RIG) for their involvement in Macondo blowout incident in what is the described as the first instance of contractors being charged for violating regulatory rules. ^[2] The unprecedented step taken by the BSEE in light of the ‘severity of the incident’ has the potential to result in insurance costs rising for oilfield services providers. Higher costs can reflect on the fee charged by contractors escalating drilling costs which can potentially hamper exploration and production efforts.

As the end result of the litigation between the BSEE and the sub contractors is not clear and the argument of the BSEE arguable, it is still too early to determine the future course of events and its impact on oilfield services providers such as Schlumberger.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Schlumberger back in Libya soon-chairman, Reuters [↩]
2. Serious New Regulatory Risks Arise for Oil Contractors, 247 WallSt [↩]