How Will Limited Exposure To North American Markets Impact Schlumberger’s Operating Profits?

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The turbulence in the commodity markets over the last two years has created a huge dent in the profitability of the oilfield services companies. Plummeting commodity prices resulted in sluggish exploration and drilling demand worldwide, particularly in the North American markets, causing a sharp drop in the demand for drilling rigs and other oilfield equipment. Consequently, large oilfield service providers suffered a significant contraction in their revenue as well as earnings.

However, Schlumberger Limited (NYSE:SLB), the world’s largest oilfield services company, displayed relatively better performance compared to its peers, due to its limited exposure to the North American markets. Below, we show how Schlumberger’s North American business accounts for only one-third of its value, while its international operations contribute the rest of its value. In contrast, Halliburton and Baker Hughes, Schlumberger’s closest rivals, derive almost 50%-55% of their value from their North American operations.

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Due to the prolonged weakness in commodity prices, Schlumberger’s exposure to North American markets has declined from 28% for the full year 2015, to almost 23% in the June quarter of 2016. Since the North American markets were the worst affected by the commodity downturn, limited exposure to these markets has enabled the Houston-based company to uphold its operating margins even in the low price environment, unlike its competitors who are struggling to remain afloat.

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That said, one cannot overlook the upside that the North American markets could offer in a favorable price environment. Hence, we believe that despite the limited presence in the North American markets, Schlumberger will have a chance to grow its operations in these markets once the commodity prices rebound. Thus, we figure that the oilfield service provider’s long-term profitability as well as value will be driven by expansion in the North American markets.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Schlumberger Limited

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