Schlumberger (SLB) Beats Marginally

A leading oilfield services company, Schlumberger Limited (SLB), reported its second-quarter earnings from continuing operations of 68 cents per share, beating the Zacks Consensus Estimate of 67 cents, while remaining flat year over year. The increase was mainly attributable to the rapid North American activity that offset weakness from the drilling moratorium in the Gulf of Mexico (GoM).

The company’s second-quarter revenue ramped up by 7.4% to $5.9 billion from $5.5 billion in the year-ago quarter, and comfortably surpassed the Zacks Consensus Estimate of $5.8 million.

Segmental Highlights

Oilfield Services revenue experienced a 10% year-over-year increase to $5.4 billion, driven by improved performances in all geographical regions, except in Europe/CIS/Africa.

In North America, second-quarter revenue jumped 36% year over year to $1.11 billion. Pre-tax operating income in the region increased substantially by 1,375% year over year to $116 million.

Latin America revenue shot up 15% year over year to $1.14 billion, while pre-tax operating income increased 17% year over year to $205 million.

Europe/CIS/Africa revenue fell 2% year over year to $1.74 billion, while pre-tax operating income in the region decreased 26% year over year to $319 million.

Middle East and Asia revenue climbed 5% year over year to $1.37 billion, while pre-tax operating income in the region inched up 2% year over year to $427 million.

WesternGeco revenue dropped 15% year over year to $476 million in the reported quarter, and pre-tax operating income plummeted 52% year over year to $47 million.

Balance Sheet

At the end of the quarter, Schlumberger had a cash balance of $3.1 billion and long-term debt of $4.50 billion, representing a debt-to-capitalization ratio of 18.4%. During the quarter, the company repurchased 8.4 million shares for a total of $535 million.

Deepwater Story

Schlumberger, a technology and solutions provider to the oil and gas industry, had no intention to resume its drilling activity in the GoM this year. However, the company remains optimistic on its international operations as operators and regulatory bodies opted for more precautionary measures without being restricted in their drilling activity.


For the remainder of the year, the company expects continued strength in U.S. Land, Brazil, North Sea and Russia, as well as in most of Middle East & Asia. However, growth will be partly tempered by reductions in IPM (Integrated Project Management) activity in Mexico in both Chicontepec and Burgos.

Notably, Schlumberger also intends to speed up the assessment of North America Land operations, which were initiated prior to the GoM incident. The review is designed to facilitate regular response, enhanced reliability and greater operational efficiency. The company said any charges, arising out of the review, would be taken up as early as the third quarter of 2010.

Our Recommendation

We believe Schlumberger’s combination of balance-sheet strength, technological leadership, and management depth should benefit in the long term. We also believe the company is favorably positioned to benefit from the current trends in oilfield services, given improving operator spending and greater need for stimulation and completion of services in North America.

With the anticipated ramp in activity in 2H10, revenue benefits to the service providers are expected to be limited in 2010, with significant impacts expected in 2011. Moreover, limited equipment availability in major resource plays like Haynesville, Marcellus and Bakken is expected to provide moderate regionalized pricing improvement. Hence, we currently maintain our Neutral rating on the stock.

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