Earnings Preview: Schlumberger

The world’s largest oilfield services provider Schlumberger Ltd. (SLB) is scheduled to report its first quarter 2011 results on April 21, 2011, before the start of trading.

The Zacks Consensus Estimate for the to-be-reported quarter is a profit of 77 cents per share (with a downside risk of 1.3%) on revenues of $9.0 billion. In the year-ago quarter, Schlumberger recorded a gain of 62 cents per share, while sales came in at $5.6 billion.

Fourth Quarter Recap

Schlumberger’s fourth-quarter 2010 results came in better than expected, helped by strong activity in the liquids-rich plays in North America and overall improvement in Canada.

Earnings per share, excluding special items, came in at 85 cents, beating the Zacks Consensus Estimate of 77 cents and were comfortably ahead of the year-ago adjusted profit of 67 cents.

Revenues of $9.1 billion were approximately 58.0% greater than what was achieved during the fourth quarter of 2009 and also surpassed the Zacks Consensus Estimate of $8.8 billion.

(Read our full coverage on this earnings report: Schlumberger’s 4Q Profit Soars)

Points to Ponder for First Quarter

Schlumberger enjoys a strong competitive position within the global oilfield services markets. It provides a broad range of services and solutions to the exploration and production sector, including drilling fluids, directional drilling and real-time drilling analysis, and project management. In the near term, Schlumberger is likely to benefit from bullish U.S. land drilling trends, where activity is above expectations.

The key negative, in our view, is the company’s recent assertion that March quarter results will be adversely affected by abnormally seasonal weather and disruptions in the Middle East/North Africa markets. The aggregate impact could lower Schlumberger’s first quarter earnings by as much as 10 cents a share.

(Read our full coverage on this story: Schlumberger Fears a Dull Q1)

Agreement of Analysts

As a result of the above-mentioned factors, there has been a downward bias among the analysts regarding Schlumberger’s outlook. In particular, we see a notable number of estimate revisions over the past 30 days.

Out of the 31 analysts covering the stock, 24 have revised their estimates downward for the first quarter of 2011, while none have gone in the opposite direction.

Magnitude of Estimate Revisions

Consequent to analysts revising estimates southward over the past 30 days, the Zacks Consensus Estimate for the quarter has gone down by 5 cents (from 82 cents to 77 cents).

Surprise History

The company has a history of positive earnings surprises, surpassing/meeting the Zacks Consensus Estimate in each of the last 4 quarters. Schlumberger has performed consistently during this period with its average earnings surprise being 4.5%. This implies that the company has beaten the Zacks Consensus Estimate by 4.5% over the last four quarters.

As such, we will not be surprised if Schlumberger reports better-than-expected results, yet again, particularly after Halliburton Co. (HAL) – the second-largest member of the oilfield services contingent – led off reporting for the group by coming out with robust numbers despite the turmoil in the Middle East and Africa.

Our Recommendation

Schlumberger shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

We like Schlumberger’s leading position in the global oilfield services market, along with its broad and technologically-complex product and service offerings, and its robust financial profile. Since the last few quarters, the company has been benefiting from increased activity in the unconventional oil and gas shale plays in North America, which have more than made up for the drop in deepwater Gulf of Mexico activity.

However, the oilfield services sector’s biggest player continues to feel pressure from intense competition in the market, depressed natural gas prices and the expected curtailment in incremental drilling projects.

As such, we see the stock performing in line with the broader market and prefer to remain on the sidelines.

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