What Sets Schlumberger Apart

Submitted by Investing Daily as part of our contributors program.

Natural gas prices are now at around $1.93 per million British thermal units, the lowest they’ve been in 10 years.

That’s partly because consumers turned down the heat due to the mild North American winter. Prices are also being dragged down by a flood of new gas from shale rock.

All this adds up to trouble for not only natural gas producers, but many energy services providers, as well. The number of operating drilling rigs in the U.S. has now fallen to its lowest level since early August, mainly because producers have cut spending on gas projects. As Utility Forecaster editor Roger Conrad wrote on April 13: “The number would have been a lot worse were it not for a shift to oil drilling.”

Schlumberger Ltd.: A Natural Gas Glut Survivor

In light of all that, it’s no surprise that many investors were nervous in the run-up to the latest earnings report from Schlumberger Ltd. (NYSE: SLB), the world’s largest oilfield services firm, on Friday morning.

As it turns out, they needn’t have worried.

In the first quarter of 2012, revenue at Schlumberger Ltd. rose 22%, to $10.61 billion from $8.72 billion a year earlier. Oilfield services revenue rose 22%. The drilling division also saw a 22% gain. Excluding unusual items, earnings per share gained 38%, to $0.98 from $0.71. That beat the Street’s expectation of $0.97.

The company saw continued strong land-based drilling activity in the Middle East and North Africa. Schlumberger Ltd. also benefited from increased drilling and deepwater exploration in the Gulf of Mexico and a strong performance from its seismic business. These gains offset the shift from gas to oil fields in the U.S.

Schlumberger Ltd. Is Profiting From the Offshore Drilling Renaissance

In a research note quoted on Reuters.com, UBS analyst Angie Sedita said, “The key to the (Schlumberger) story is the acceleration of international and deepwater activity, which should escalate in 2013 and beyond.”

Meanwhile, investment bank Simmons & Co. pointed to the company’s broad-based business model as the key to the gains. In a note to clients quoted in an article on Barrons.com, Simmons said:

“The seismic commentary was brimming with vigor. What little spare capacity is available in the marine contract segment is filling fast, and the backlog is trending higher (up 30% y/y and 16% q/q), as is pricing. Thus, at long last we are beginning to see SLB’s differentiated business model bearing fruit.”

Even so, some saw roadblocks ahead for Schlumberger Ltd. Zacks.com, for example, cited a number of risk factors, including volatile commodity prices and overseas political volatility:

“Schlumberger’s financial and operational performances face a number of headwinds, including changes in exploration and production spending patterns, commodity price fluctuations, geopolitical risks, regional spending trends, competition, new technology and changes in economic conditions. Additionally, foreign currency fluctuation is also a threat to the company’s profitability.”

As far as Schlumberger Ltd. shares go, the site said it would “remain on the sidelines.”

Schlumberger’s Long Overseas Experience Is an Overlooked Advantage

Still, it’s important to keep in mind that a key part of the company’s improved international performance has been a return to stability in many of its markets, including Libya, where it restarted its operations in the fourth quarter of 2011.

In addition, Schlumberger has many years of experience operating overseas, stretching all the way back to the company’s founders, French brothers Marcel and Conrad Schlumberger, who had conducted geophysical surveys in Serbia, Canada, South Africa, Congo and the U.S. before they founded the company in 1926. That long experience will continue to help Schlumberger deal with any unexpected geopolitical turbulence.

While North American natural gas prices aren’t expected to rebound anytime soon, the company sees oil prices holding steady. That bodes well for its deepwater and Middle East operations, as well as North American shale oil production.

To top it off, Schlumberger continues to buy back its own stock. In the latest quarter, it repurchased 4.4 million of its shares for $74.01 each, for a total cost of $324 million.

Article originally posted here.