Schlumberger (SLB), the world’s largest oil field service provider, is expected to release its Q4 2012 earnings on January 18th. In Q3, while the performance of most U.S.-based oilfield services firms was weighed down by the weak domestic drilling landscape, Schlumberger bucked the trend by leveraging its strong international presence, posting sequential growth in revenues and income, from continuing operations of 2% and 3% respectively. While we expect the firm’s North American results to remain lackluster in Q4, the firm has also warned that some regions in the global market could face setbacks due to contractual delays and seasonal slowdowns. Here we provide a brief overview of the factors that we will be tracking when the firm releases its earnings Friday.
Weaker Land Drilling In U.S. And Canada Will Continue To Weigh Down Margins
While Schlumberger is a lot less dependent on the North American market than competitors like Halliburton (HAL) and Baker Hughes (BHI), the region is still the firm’s largest market, accounting for about 31% of total revenues. Over the last year, the total number of rigs in North America has fallen by around 15%, primarily due to weak natural gas drilling (gas rig count was down 44%), and partially offset by an increase in the oil rig count (up by around 6%). (See Also: The North American Drilling Landscape And Where It’s Headed In 2013) The decline in natural gas prices prompted oil and gas firms to reduce drilling for gas, thereby impacting demand for services like fracking, which are used to extract gas from shale rock formations. This has caused an over supply of pressure pumping equipment in the market, thereby pushing down prices for pumping services and margins across the industry.
The grim results could persist into the fourth quarter as well as the firm warned in December that margins for Q4 could again be impacted by weak land-based drilling in both, U.S. and Western Canada. We believe that a complete recovery for the firm’s North American operations is likely to be a few quarters away and will be contingent on recovering natural gas prices and a continuing increase in the oil rig count.
Growing U.S. Offshore Activity And Subsea Deals
Offshore drilling is typically more profitable for oil field service firms due to the higher service intensity and the opportunity to provide packaged services. While the international offshore rig count has remained relatively flat over the past year, offshore drilling activity in the U.S. Gulf of Mexico has been strong. The number of rigs working offshore in North America has grown by around 22% over the last year as higher oil prices are making it feasible for oil and gas companies to explore in deeper waters.
The firm has been steadily ramping up its expertise in the lucrative subsea technologies space over the past few years. In 2011, the firm acquired Framo Engineering, a Norway-based company that provides technologies focused on the subsea market. More recently, the firm signed a deal with Cameron International Corp., a provider of subsea equipment, to jointly develop products, systems and services for the subsea market. These investments could help the firm expand and improve revenue per rig in offshore markets going forward. We will be tracking the firms progress in regions like Norway, U.K., Brazil and the U.S. Gulf of Mexico, which are predominantly markets for offshore drilling.
Schlumberger derives over two-thirds of its revenues from its international operations. While these operations helped the firm offset a weak North American market in the last quarter, things are likely to be different in Q4, as the firm has warned that margins could be impacted by contractual delays and seasonal slowdowns in the Europe/Africa/CIS region. (See Also: Schlumberger Issues Q4 Operational Update)
A key factor that we will be tracking on the international front is the firms progress in securing business with national oil companies (NOC). Schlumberger’s share of revenues from national oil companies have doubled to about 32% since 2002, and growing these revenues further will be important to the firm going forward, since NOC’s control around 85% of global proven oil reserves, a large portion of which are under-exploited. (See Also: Do National Oil Companies Hold The Keys To Schlumberger’s Future?) Another trend we will be watching is the firm’s progress in securing contracts in the global unconventional plays space. Schlumberger currently caters to unconventional plays in the North American market, which is currently facing significant headwinds. To diversify revenues, the firm could look towards markets like China, Australia and the U.K. (See Also: Schlumberger Can Gain From UK Lifting Its Fracking Ban)
Disclosure: No positions