Schlumberger's (SLB) strong performance last quarter in the Gulf of Mexico was offset by weaker performances in Europe/CIS/Africa, Middle East, and Asia-basically everywhere but the Gulf of Mexico. This is uncharacteristic of the company considering it has the highest margins of any global company in overseas markets.
Ironically, North American holdings are supposed to be low performing in 2013 while the overseas regions are going to grow.
Its weakness continues to be the North American land drilling. In the U.S., weakness in pressure pumping continues. There is some uncertainty in the first quarter of 2013 caused by pricing pressure outside of hydraulic fracturing. The year is expected to start well as rigs are up in both the U.S. and in Canada, but Schlumberger does not expect production to match 2012. Pricing pressure is going to be the key that keeps the North American region lower in 2013. There is no recovery for hydraulic fracking pricing this year and oil prices are just now recovering.
The system of hiring oil service providers to perform specialized tasks that are required to extract oil and gas from the ground for exploration and production companies, has been slowing for a couple quarters. The stress of cash flow issues and volatile pricing has had many oil producers slowing the pace of drilling. An analyst for Simmons, Bill Herbert described land drilling in North American like this:
"Drilling activity in the U.S. and Canada has been weaker than expected, with exploration and production companies tightening their belts and trying to live within their cash flow. North America has been more poorly behaved than what companies thought…Revenue generation and margin performance are falling short of what was thought coming out of the second quarter."
Unconventional drilling has also proven to be more challenging than the industry thought a couple years back. Drilling has turned out to be more expensive and it is just recently that oil prices started to rise again.
Overseas and Gulf of Mexico
Outperforming in the Gulf of Mexico helped the offshore business. It posted a 24% sequential rise in revenues in the Gulf of Mexico bolstered by rising deep-water rig activity and a seasonal rise in year-end, multi-client seismic sales.
In the international arena, earnings per share would be 5 to 7 cents lower in the fourth quarter because of contractual delays in Europe, Africa and the former Soviet Union countries. The company experienced a somewhat choppy fourth quarter due to transitory issues. International markets have been the bright spot for many companies like Schlumberger in early 2012, but continued to get more sluggish as the year came to a close. As early as last September, rig counts were down and falling in the Middle East and Latin America, we expect activity levels to increase and enjoy healthy growth throughout 2013.
International Plans & Outlook
International spending will climb this year by 10% as the company invests in exploration and production abroad. This comes as no surprise considering it generates two-thirds of its revenue internationally. Saudi Arabia is expected to be a strong year as rigs are projected to grow to around 160. Working in tandem with Saudi Aramco, deep rig development will also start in the Red Sea as it continues shallow water exploration also. In China, the company has a solid foothold in the Bohai Bay region but is also exploring inland joint ventures. But I believe what will drive Schlumberger in 2013 will be its deep-water drilling. The company should prosper in its two major regions, the Gulf of Mexico and China, but it also is exploring work off Cameroon. It will be using the OneSubSea venture, will include a $600 million investment and a 40% claim in the offshore venture.
The first quarter of this year, the company will see the regular seasonal slow down in the North Sea, Russia, and China land. For the year, the company expects growth in ECA and EMEA. Sub-Sahara Africa and Russia are expected to see good growth. China and Australia in Asia and then Oman, UAE, and Saudi Arabia in the Middle East are also regions pegged for good growth this year.
I believe Schlumberger has enough investment and project development to get back on track here in 2013 with its overseas and deep-water drilling in the Gulf of Mexico. The stock is presently on a nice bullish run and I would expect that to continue for the immediate future.