Schlumberger To Post Impressive 4Q’17 Results Backed By Recovery In Commodity Prices

Schlumberger (NYSE:SLB), the world’s largest oilfield services company, is set to begin the earnings season for the industry by releasing its December quarter and full year 2017 financial performance on 19th January 2018((Schlumberger To Announce Fourth Quarter 2017 Results, www.slb.com)). The market expects the company to post a strong improvement in its top line as well as bottom line, both on an annual and sequential basis, backed by the continued demand for drilling and production equipment and services, evident from the growth in the global rig count. In addition to this, the oilfield contractor’s plans to enter the oil and gas production space by acquiring equity stakes in drilling projects, are likely to contribute a notable portion of its value going forward.

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Key Highlights Of 4Q’17

• The North American oil and gas rig count experienced a dip in the months of October and November. However, with the extension of the OPEC production cuts, the WTI crude oil prices rose sharply in December and averaged at around $55 per barrel during the quarter, almost 15% higher than the previous quarter. For the full year 2017, the oil prices averaged at almost $51 per barrel, 17% more than 2016. As a result, the region’s rig count recovered to 1,135 units at the end of the December quarter.
• Contrary to this, the Latin American and the Middle East markets showed signs of improvement during the quarter. The international rig count rose to 954 units during the same quarter, as opposed to 929 units in the same quarter of last year. For the full year 2017, the global rig count rose to 2,089 units, compared to 1,772 units at the end of last year. Given the surge in the global rig count during the year, we expect to see a sharp rise in Schlumberger’s revenues for the quarter as well as full year.

• Apart from this, Schlumberger has consistently worked on improving its current product offerings as well as developing new and advanced products to enhance the efficiency of the existing wells, and reducing the cost of operations for the clients. While it has made significant progress in enhancing its product offerings, it has continued to witness pricing pressure in several markets. We expect this pricing pressure to keep the company’s revenues subdued for the quarter as well as full year 2017.

• In addition to this core business, the oilfield contractor has been expanding its operations into the conventional oil and gas production business through its Schlumberger Production Management (SPM) unit. During the fourth quarter, the company entered a definitive agreement with Cenovus Energy to purchase the Palliser Block located in Alberta, Canada for a cash consideration of $1 billion.
• We believe that this new strategy will allow the company to actively participate in the drilling process and oilfield management of these projects without competing with its peers for the various service contracts in a project. This will enable the company to leverage the entire upside associated with the projects. However, the company will miss out on the upfront service payment it receives from its clients, but would rather be responsible for the downside in case these projects fail to deliver. We expect this strategy to diversify the company’s risk and contribute notably to the company’s valuation in the long term.

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