Oilfield services giant Schlumberger (NYSE:SLB) reported a 3% sequential decline in revenues and a 12% drop in net income in Q1 2012 as a result of seasonal variation in demand and changing North American industry dynamics.  On a year-over-year basis, revenues increased significantly but pricing pressure in North America compressed the company’s margins. The company’s performance in international markets remained strong as expected. Rival Baker Hughes (NYSE:BHI) will be coming out with its results next week.
We have revised our price estimate for the company’s stock from $100 to $93 as a result of margin pressure, industry trends and other factors.
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North American market
Low natural gas prices in the U.S. have resulted in a major shift in the North American energy market. With natural gas prices falling to their lowest point in a decade, explorers are shifting activity to liquids-rich plays. Oilfield services players are responding to the change by relocating rigs and crews to oil rich areas, which is lowering utilization and efficiency. However, the bigger risk to the business is that with pressure pumping capacity now concentrated in liquid-rich plays, pricing for these services is falling. Lower pricing can impact both revenues and margins for Schlumberger.
The rising cost of crucial inputs for fracturing is also becoming another issue for Schlumberger. On Halliburton‘s (NYSE:HAL) earnings call, the company focused on the rising cost of gaur, an agricultural product used in fracking fluids. (See: Halliburton Stock Worth $43 Despite Weak Natural Gas Prices) A sustained increase in these input costs would put significant pressure on Schlumberger’s margins.
The company’s performance in international markets remained strong, held up by high oil prices in the quarter. Management commented that strength in the deepwater market and in Sub-Saharan Africa and Latin America had a positive impact on its results. There was a slight impact on the company’s performance because of seasonal weakness in exploration and production.
Schlumberger said that with sustained high oil prices and a recovering world economy, the industry should record robust growth going forward.
- $2 Natural Gas Could Hit Halliburton’s Exploration Business (trefis.com)
- Schlumberger Earnings Preview: North America To Weigh On Performance (trefis.com)